While artificial intelligence (AI) gets a lot of attention, it’s fair to say that stock splits are currently the hottest trend on Wall Street.
A stock split is a tool that publicly traded companies can rely on to cosmetically change their stock price and number of outstanding shares by the same factor. I say “cosmetic” because stock splits have no effect on a company’s market capitalization or its operating performance.
Publicly traded companies can perform two types of stock splits: forward and reverse. With a forward stock split, a company attempts to lower its nominal stock price to make it more affordable for ordinary investors. The purpose of a reverse stock split is to increase a company’s stock price, usually with the goal of ensuring continued listing on a major stock exchange.
Because forward stock splits are executed from a position of operating strength, this is the type of split that most investors focus on.
In addition, a bank of america A study by Global Research found that companies that performed a forward split gained an average of 25.4% in the 12 months following the announcement of their split (since 1980), which is more than double the average return of 11.9% for the benchmark. S&P 500 over the same timeline. This outperformance has not gone unnoticed by Wall Street institutions and their analysts.
In the first half of 2024, nine prominent companies announced and/or completed stock splits, eight of which were forward splits. According to lofty price targets from select Wall Street analysts, three of these stock split stocks could rise by as much as 130% over the next year.
Nvidia: Implied Upside of 62%
The first stock that could skyrocket from a stock split, at least based on a Wall Street analyst’s prediction, is AI giant Nvidia (NASDAQ: NVDA)Nvidia announced a 10-for-1 stock split on May 22, effective after the market closed on June 7.
Adjusted for the company’s recent split, Rosenblatt analyst Hans Mosesmann has placed a $200 price target on Nvidia’s stock, which represents a 62% upside from the June 28 closing price. If Mosesmann’s price target proves correct, Nvidia’s market cap would rise to nearly $5 trillion.
Mosesmann’s optimism boils down to two major factors. The first is Nvidia’s dominant market share of AI-inspired graphics processing units (GPUs) used in high-compute data centers. Semiconductor analytics firm TechInsights estimates that Nvidia was responsible for 98% of the 3.85 million AI GPUs shipped last year. Nvidia’s next-generation AI GPU architecture, including Blackwell and Rubin, should help it maintain its compute advantage.
The other major driver in Mosesmann’s eyes is Nvidia’s software. In particular, his lofty price target points to the success of Nvidia’s CUDA platform, the toolkit that helps teach developers how to build large language models. Because CUDA and AI-accelerated GPUs go hand in hand, Nvidia itself has a high-margin, one-two punch.
Unfortunately, history has not been kind to next-big-thing innovations over the past three decades. No breakthrough innovation or technology has been able to avoid an early bubble-burst event, and AI is likely to be no exception.
What’s more, Nvidia is facing competition from all sides. In addition to external competition, which is likely to undermine its dominant AI GPU share, the company’s four largest customers by net revenue are all developing their own AI GPUs. In short, we’re likely seeing a spike in pricing power and demand for Nvidia’s chips.
Chipotle Mexican Grill: Implied Up 28%
A second stock that could be split and has the resources and intangibles to rise is the fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG)Chipotle’s board of directors gave the green light for the company’s first-ever split on March 19, with the company executing its historic 50-for-1 forward split after the market closed on June 25.
Chipotle’s biggest Wall Street cheerleader is Bernstein analyst Danilo Gargiulo, who has set an $80 price target for the company. If Gargiulo’s prediction is correct, shareholders could see an additional 28% upside from where the stock closed on June 28.
Gargiulo’s long-term optimism for Chipotle centers on a number of catalysts at the company’s disposal. Gargiulo’s recent note specifically spoke to the company’s strong connections with Gen Z and its ability to connect with these consumers through digital platforms. Additionally, he believes the company can lean on its loyalty program to drive higher-margin digital sales.
There’s no doubt that the management team at Chipotle Mexican Grill knows its customer base well. By sourcing meat responsibly and preparing the food daily in its restaurants, management discovered long ago that people are happy to open their wallets and absorb inflationary price increases.
Additionally, Chipotle’s relatively limited menu has served as a source of growth. By keeping the menu small, employees can prepare meals quickly, which helps keep lines in stores moving.
But at some point, valuation comes into play. While Chipotle’s sales growth has consistently outpaced that of its peers, the company’s comparable sales growth at existing restaurants has been only 7% in the first quarter. While this is a fantastic number compared to the competition, it does not come close to justifying a forward price-to-earnings (P/E) ratio of almost 47.
Sirius XM Holdings: Implied Upside of 130%
The third stock that could absolutely skyrocket from a stock split, based on a Wall Street analyst’s lofty price target, is satellite radio operator Sirius XM Holdings (NASDAQ: SIRI).
On June 17, a filing with the Securities and Exchange Commission said Sirius XM plans to conduct a 1-for-10 reverse stock split when it merges with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. This merger, which will create a single shareholder base, is expected to close in the third quarter. This also makes Sirius XM the only prominent company of the nine stocks splitting in 2024 not to do a forward split.
The main bull in Sirius XM’s camp is Benchmark analyst Matthew Harrigan. While Harrigan lowered his firm’s price target on Sirius XM by $0.50 per share in March, his $6.50 price target still implies upside of up to 130%, based on the shares’ June 28 prices.
The challenge facing Sirius XM right now is the prospect of weaker auto sales. Sirius XM relies on new car purchases to convert promotional users into self-pay subscribers. If the U.S. economy weakens and/or auto sales decline, this conversion to self-pay subscribers could slow or even temporarily shift in the opposite direction.
Despite these concerns, Sirius XM Holdings has a number of well-defined competitive advantages that make the company very attractive from an investment perspective.
As the only satellite radio operator, the company has fairly strong subscription pricing power, which helps ensure that Sirius XM can outpace prevailing inflationary pressures.
Sirius XM’s sales channels also give it a clear advantage compared to terrestrial and online radio operators. While traditional radio operators rely heavily on advertising for the majority of their revenue, Sirius XM generated about 78% of its net revenue from subscriptions in the first quarter. Because subscribers are less likely to cancel their service than companies are to cut ad spending during a recession, Sirius XM is better suited to navigate economic uncertainty.
Sirius XM Holdings is also the cheapest stock with a stock split — and it’s not even close. The company’s shares can now be purchased for less than 9 times next year’s earnings, the lowest forward price-to-earnings ratio since its 1994 IPO.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America and Sirius XM. The Motley Fool has positions in and recommends Bank of America, Chipotle Mexican Grill, and Nvidia. The Motley Fool has a disclosure policy.
3 Stocks With Stock Splits That Could Soar Up To 130%, According To Select Wall Street Analysts was originally published by The Motley Fool
