While artificial intelligence (AI) is clearly the next big trend that will drive Wall Street’s major stock indexes to record highs in 2024, don’t overlook the equally important role that the euphoria surrounding stock splits has played in driving stock prices higher.
Stock splits are a tool that publicly traded companies have at their disposal to cosmetically adjust their stock price and number of shares outstanding. The “cosmetic” aspect of splits is that adjusting a company’s stock price and number of shares by the same factor does not affect its market capitalization or underlying operating performance.
There are two types of stock splits, with investors preferring one considerable more than the others. Reverse stock splits are designed to increase a company’s stock price, usually with the goal of ensuring continued listing on a major stock exchange.
In comparison, forward stock splits aim to lower a company’s stock price to make it nominally more affordable for retail investors who may not have access to fractional share purchases through their broker. Because this type of split is executed by companies in a position of operating strength, investors typically focus their attention on those that execute forward splits.
In 2024, just over a dozen well-known companies announced or completed a stock split, all but one of which were forward splits. Some of the most notable include: Nvidia‘s 10-for-1 split in June, Broadcom‘s 10-for-1 split in July, Chipotle Mexican Grill‘s historic 50-for-1 split in June, and Walmartthe 3-for-1 split of ‘s, which started in late February.
Aside from being proven market leaders, companies announcing stock splits have, statistically, outperformed the benchmark by a wide margin S&P 500 in the 12 months following the announcement of their split (since 1980). That’s why investors are always trying to guess which stocks might join this exclusive club next.
Since most companies choose to announce a split when they release their quarterly earnings, there are two unstoppable companies that emerge as logical candidates to undergo the next stock split on Wall Street in September.
Costco Wholesale
The first sensational company that looks set to announce a stock split next month is a company that has risen nearly 153,000%, including dividends, since its initial public offering (IPO) in December 1985. I’m talking about Warehouse Club Costco Wholesale (NASDAQ: COST)which is expected to report fourth fiscal quarter results on September 26.
It’s been a while since Costco Wholesale has done a stock split to make its shares more nominally affordable to ordinary investors. Since going public, Costco has done three forward splits, though the last one (2-for-1) occurred in January 2000. With Costco’s stock now trading above $900, a split seems long overdue.
Costco’s consistent outperformance can be attributed to three catalysts.
The most obvious one is that it is a consumer staples stock. While companies that provide basic necessities and services rarely, if ever, wow investors with their growth rates, they do generate highly predictable operating cash flow. Regardless of how well or poorly the U.S. economy performs, consumers will visit stores for basic necessities, including food, beverages, and various household products.
The company’s size is the second competitive advantage. Costco’s deep pockets allow it to buy goods in bulk, which reduces the per-unit cost of each item. A lower upfront cost, coupled with a factor I’ll discuss shortly, helps Costco undercut the prices of big box stores and traditional neighborhood stores — and we all know how important price is to attracting the average consumer.
The third and, arguably, most important catalyst for Costco’s continued success is its membership-based operating model. Membership revenue is high and provides a healthy cushion for undercutting local competitors.
Additionally, paying for a membership will encourage consumers to get value for their money. This means that they will remain loyal to Costco and, more than likely, visit the warehouses when making large purchases.
Adobe
The other unstoppable stock that has a rich history of outperformance and looks poised to become Wall Street’s next stock splitter is none other than cloud software giant Adobe (NASDAQ: ADBE)Adobe shares have risen more than 287,000%, including dividends, since going public in August 1986.
Adobe has performed six stock splits in the past 38 years, each of which was of the 2-for-1 variety (March 1987, November 1988, August 1993, October 1999, October 2000 and May 2005). However, it hasn’t split its stock in more than 19 years, and the stock is approaching $570 per share. With the company’s fiscal third quarter operating results due to be released after the closing bell on September 12, the table is set for Adobe to announce its seventh split since going public.
Like Costco, there are three well-defined catalysts that Adobe excels at.
For starters, the company’s Creative Cloud applications, including Photoshop, Illustrator and Premiere Pro, along with its Document Cloud services like Acrobat, are the undisputed choice of content creators. Adobe’s consistent double-digit, flat-currency revenue growth is evidence that digital media professionals are increasingly monetizing their work and are becoming increasingly dependent on Adobe’s ecosystem of high-margin products.
Perhaps the most important catalyst for Adobe is that it is primarily a subscription-driven operating model. Of the approximately $10.5 billion in revenue it generated in the first six months of fiscal year 2024 (ending May 31), 95% can be traced to subscriptions. The value of subscription-based models is that they keep customers loyal to the brand and within the company’s umbrella of products and services. It also facilitates cross-selling opportunities.
The final piece of the puzzle for Adobe was its commitment to artificial intelligence. In March 2023, it launched Firefly, the tool that lets content creators harness the power of generative AI to produce lifelike images in Photoshop and create images from text in Adobe Express and Adobe Stock. If the euphoria around AI continues, Adobe should benefit the most.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Chipotle Mexican Grill, Costco Wholesale, Nvidia and Walmart. The Motley Fool recommends Broadcom and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
These 2 unstoppable stocks — up 153,000% and 287,000% since their IPOs — are logical candidates to announce a stock split in September was originally published by The Motley Fool
