Although Wall Street is currently firmly entrenched in a bull market, it has been nothing short of a wild ride for investors since the start of this decade. The Dow Jones Industrial Average, S&P500And Nasdaq Composite oscillated between bear and bull markets between 2020 and 2023.
When uncertainty is a dominant theme on Wall Street, it’s not unusual for investors of all stripes to seek the safety of leading companies that have easily outperformed the major stock indexes. For years, this had led to investors flocking to the ‘FAANG stocks’. But over the past three years, it’s been companies doing stock splits that investors can’t stop buying.
Investors are attracted to stocks that go through splits
A ‘stock split’ allows a publicly traded company to cosmetically change both its share price and the number of shares outstanding to the same extent. I use the word “cosmetic” to clarify that stock splits have no effect on the market capitalization or operating performance of an underlying company.
Stock splits come in two varieties: forward and reverse. A forward-stock split is intended to make a company’s shares more nominally affordable for investors who may not be able to purchase fractional shares through their online broker. Meanwhile, a reverse stock split aims to increase the stock price of a publicly traded company to secure its listing on a major stock exchange.
While there have been a handful of stocks over the years that have become wildly successful following a reverse split, most investors rightly chase after companies that execute a forward stock split. Companies that implement forward splits often innovate better than the competition and have outperformed the benchmark S&P 500.
Since mid-2021, about a dozen high-profile companies have announced and/or completed stock splits, including FAANG components Amazon And Alphabet. In less than five months of 2024, four new juggernauts have joined this elite club.
Wall Street’s “Class of 2024” stock split stocks
Announcements of a stock split started in late January when the retail kingpin Walmart (NYSE:WMT) plans revealed to implement a 3-for-1 forward split. Although Walmart’s stock price was not absurdly high at the time (around $165), the company’s management team wanted to ensure that employees would be able to purchase whole shares of stock if they chose to participate in the Associate Stock Purchase Plan.
Walmart began trading at its split-adjusted price on February 26, which is also the day S&P Dow Jones Indices made a few changes to the iconic Dow Jones Industrial Average. Given Walmart’s ability to use its size to its advantage to undercut price competition, it’s unlikely this will be the company’s last stock split.
Next was the fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG), whose stock price was nearly $3,000 when it announced in March its intention to execute a 50-for-1 forward split at the end of June. Like Walmart, Chipotle’s management team wants to split its stock to make it more accessible to its team members.
Shares of Chipotle have skyrocketed more than 14,200% since its initial public offering price of $22 in January 2006. In addition to offering fresher foods that consumers have clearly shown they are willing to pay more for, Chipotle has benefited greatly by making its menu compact hold. A smaller menu allows staff to prepare meals quickly.
After Chipotle came along Sony group (NYSE: SONY). The Japan-based consumer electronics company announced a 5-for-1 stock split on May 14, with an effective date for the company’s American Depository Receipts (ADRs) on October 8. This is Sony’s first stock split in 24 years.
Despite slower sales of Sony’s PlayStation 5 gaming console, which debuted in late 2020, the company has seen solid revenue growth from its PlayStation Plus subscription service, which lets gamers store their data in the cloud and play multiplayer games with their friends. Sales of the company’s image sensors, which are used in next-generation smartphones, were also strong.
Now Wall Street has a fourth stock split in 2024, and it’s a household name: artificial intelligence (AI) kingpin Nvidia (NASDAQ: NVDA).
Say hello to Wall Street’s latest stock split
Interestingly, Nvidia is one of the roughly “dozen high-profile companies” I alluded to earlier that have increased investors’ fascination with stock splits since mid-2021.
After the closing bell on May 22, Nvidia released its operating results for the fiscal first quarter (ending April 28) and announced a 10-to-1 forward split that will take effect before the start of trading on June 10. This marks the sixth split. since Nvidia became a publicly traded company, and the first since July 2021, when it completed a 4-for-1 split.
As has become the norm over the past eighteen months, Nvidia has clouded Wall Street’s consensus sales and earnings estimates for the quarter ending in April. Net revenue more than tripled to $26 billion from the prior year period, with data center revenue increasing 427% versus what was reported in the comparable quarter of fiscal 2024.
The catalyst for Nvidia is undeniably AI. The company’s A100 and H100 graphics processing units (GPUs) fuel the split-second decision-making needed in high-compute data centers that process generative AI solutions and train large language models. It is estimated that Nvidia’s chips make up about 90% of GPUs deployed in AI-accelerated data centers.
Nvidia has also been one of the main beneficiaries of demand absolutely swamping supply. Even at a top chip manufacturer Taiwanese semiconductor manufacturing By meaningfully increasing its chip-on-wafer-on-substrate (CoWoS) capacity – high-bandwidth memory is packed on CoWoS and is a real necessity for AI-accelerated data centers – Nvidia is nowhere near it meet AI GPU demand. As a result, it enjoyed an out-of-this-world price level for its chips and increased its gross margin to over 78%.
Based solely on Nvidia’s operating results over the past year and the changes, the company seems unstoppable.
But appearances are deceiving.
History will catch up with Nvidia sooner or later
While it’s hard to find fault with Nvidia’s first-quarter operating results, the company’s guidance and history provide clues that suggest this stock split stock could be taken off its pedestal sooner rather than later.
One of the most glaring concerns for Nvidia is how the innovation trends of the future have played out over the past thirty years.
Since the advent of the Internet, every next-big-thing innovation has worked its way through an early-innings bubble caused by high investor expectations. In simpler terms, investors have a terrible habit of overestimating how quickly a new technology, innovation or trend will be adopted. History suggests so very Artificial intelligence is unlikely to be the exception to this unwritten rule. While Nvidia’s GPUs could still be wildly successful in the long run, it’s probably not in the cards for the company’s stock to maintain its near-parabolic rise.
Nvidia’s fiscal second-quarter expectations also raised a red flag that likely flew over most investors’ heads. During the first quarter, Nvidia’s gross margin (net sales minus sales costs) tilted to 78.4%. But for the second quarter, Nvidia forecasts an adjusted gross margin of 75.5%, plus or minus 50 basis points.
This predicted gross margin improvement of almost three percentage points is likely the result of two factors. First, Nvidia is starting to face its first real onslaught of external competition. Advanced micro devices And Intel both introduce their respective H100 GPU rivals. Even if Nvidia’s chips are favored in data centers, the mere presence of these third-party competitors will reduce AI GPU scarcity and almost certainly weaken Nvidia’s pricing power.
The other likely problem is competition from within. Nvidia’s top customers include: Microsoft, Metaplatforms, Amazon and Alphabet. Together these four companies account for approximately 40% of net sales. The problem is that all four of them are developing their own AI GPUs for their data centers. More than likely, this is the peak quarter for Nvidia’s gross margin.
While stock split stocks are expected to remain all the rage on Wall Street, not all of them are worth investing in.
Should You Invest $1,000 in Nvidia Now?
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Chipotle Mexican Grill, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Walmart. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel, long January 2026 $395 calls to Microsoft, short January 2026 $405 calls to Microsoft, and short May 2024 $47 calls to Intel. The Motley Fool has a disclosure policy.
Meet Wall Street’s Latest Stock-Split Stock – A Company on the Cutting Edge of the Hottest Innovation Originally published by The Motley Fool
