While historically popular trends like artificial intelligence (AI) have dominated headlines on Wall Street, it’s stock split euphoria that has played an equally impressive role in the broader market’s rise in 2024.
Simply put, a stock split is a tool that publicly traded companies can rely on to adjust their share price and number of outstanding shares by the same factor. The beauty of stock splits is that they are entirely cosmetic and have no effect on a company’s market capitalization or underlying operating performance.
There are two types of stock splits: forward and reverse, with the former far more popular than the latter among the investment community.
Reverse splits are performed to increase a company’s stock price, often with the goal of maintaining listing standards on a major stock exchange. Since most reverse stock splits are performed from a position of operational weakness, investors tend to shy away from this form of split.
Meanwhile, forward stock splits are designed to lower a company’s stock price to make it nominally more affordable for retail investors who don’t have access to fractional share purchases through their broker. Companies with high-flying stocks that require a forward split to make their stock “nominally more affordable” tend to be better at executing and innovating than their competitors.
Since the curtain rose on 2024, 13 phenomenal companies have announced or completed stock splits. None of these splits was more anticipated than the AI giant’s. Nvidia (NASDAQ: NVDA). Since companies that perform forward splits have more than doubled the benchmark’s return since 1980 S&P 500 In the 12 months following their split announcement, investors are eager to see which top company will next announce a future stock split.
Nvidia had all the hallmarks of a stock split on Wall Street
Before Nvidia announced its largest forward split ever (10-for-1) on May 22, there was ample evidence that a stock split was imminent.
The obvious clue with Nvidia was that its shares had risen 550% between the beginning of 2023 and the day it reported its fiscal first quarter operating results, where it announced its historic split. No one on Wall Street has ever seen a market leader add $2.8 trillion to its market cap in the blink of an eye.
To build on this point, Nvidia’s stunning returns have made it extremely popular with everyday investors. It has become the fourth most held security (including exchange-traded funds) on the retail-dominated online trading platform Robin Hood photoNot requiring retail investors to pony up $1,300 to buy a single share of Nvidia stock could help maintain the euphoria behind the near-parabolic climb.
Nvidia’s market-leading status among developers of graphics processing units (GPUs) for AI-accelerated data centers also made it a logical candidate to execute a stock split. Semiconductor analysis firm TechInsights estimates that of the 2.67 million data center GPU shipments in 2022 and 3.85 million GPU shipments in 2023, Nvidia was responsible for all but 30,000 GPUs shipped in 2022 and 90,000 GPUs shipped in 2023. It has a stranglehold on the GPU market share that powers generative AI solutions and large language model (LLM) training in enterprise data centers.
The company’s CUDA computing platform is another reason why splitting Nvidia’s stock made sense. CUDA is the toolkit that helps developers build LLMs and accelerate computing applications. The key point is that Nvidia’s software works with its top-tier hardware to keep companies loyal to its myriad products and services.
Now that Nvidia has laid out its plan for future stock splits, one logical candidate stands out.
Prediction: This 150,000% winner will be the next high-profile stock split announcement on Wall Street
As for brand names, proven, dominant companies, I expect the next high-level stock split announcement on Wall Street will come from a big box store Costco Wholesale (NASDAQ: COST).
While no stock price rises every year, Costco has come very close to breaking the mold. Including dividends, Costco has delivered positive total returns to shareholders in 20 of the last 23 years. Even more impressive, its shares have increased in value by 150,000% since its initial public offering (IPO) in December 1985, including dividends.
It’s been nearly a quarter century since Costco last split, with three previous splits in January 2000 (2-for-1), March 1992 (3-for-2) and May 1991 (2-for-1). With the company’s stock approaching $900, it’s reasonable to assume that some ordinary investors without access to fractional share purchasing may be forced to stay on the sidelines.
One of Costco’s biggest and most obvious competitive advantages is its size. The company’s deep pockets allow it to buy goods in bulk, which lowers the per-unit cost of each item. Because price is such a major concern for shoppers, buying in bulk has consistently helped Costco undercut traditional grocery chains and small shops on cost.
It is important to note that Costco’s warehouses sell a mix of discretionary and consumer goods. Regardless of how well the U.S. economy is performing or what the prevailing inflation rate is, consumers still need to buy groceries and basic household necessities. In other words, Costco appeals to consumers in all economic climates, which generally results in highly predictable sales and operating cash flows.
Another recognizable advantage that Costco brings to the table is its membership-based business model. Annual membership fees generate high margins and can be used to offset the low prices and razor-thin margins on groceries, which helps the company recruit new members. Additionally, paying an annual fee to shop at Costco will incentivize consumers to get the most out of their membership. In short, they will choose Costco over other shopping destinations when making big purchases.
The final piece of the puzzle for Costco is its exceptional pricing power. Starting Sept. 1, annual fees for its Gold Star and Business memberships will increase by $5 to $65, while Executive memberships will rise by $10 to $130 per year. The first membership price increase since 2017 won’t deter the warehouse club’s fiercely loyal customers.
When Costco reports its fourth fiscal quarter results on September 26, don’t be surprised if the company also announces its first stock split since January 2000.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Nvidia. The Motley Fool has a disclosure policy.
Prediction: The next stock split announcement on Wall Street will come from a company that’s up 150,000% since going public was originally published by The Motley Fool
