What’s rarer than planets aligning in the night sky? The answer is that Wall Street’s two hottest trends are intersecting: artificial intelligence (AI) and stock splits.
AI, which uses software and systems to perform tasks that humans would normally perform or oversee, has the potential to completely change the long-term growth of businesses around the world. In a report released last year, PwC analysts estimated that AI could add $15.7 trillion to the global economy by 2030. With numbers this big, it’s no surprise that AI stocks are soaring.
Meanwhile, a stock split is a completely cosmetic event that allows a publicly traded company to change the number of shares outstanding and the stock price by the same factor. It is “cosmetic” in the sense that stock splits do not change a company’s market capitalization or operating performance.
Stock splits have different purposes depending on the type of split. A forward-stock split is intended to make shares nominally more affordable for private investors. On the other hand, a reverse stock split increases a company’s stock price to meet minimum listing standards on a major stock exchange. Most investors tend to focus on companies that implement forward splits, as we’ve recently seen with AI stocks.
Nvidia and Broadcom are sparking the stock split mania among artificial intelligence stocks
In just a few weeks, we’ve seen the two most influential AI companies announce stock splits. Nvidia‘S (NASDAQ: NVDA) The board greenlighted a 10-for-1 stock split on May 22, which was ultimately completed after the close of trading on June 7. Broadcom (NASDAQ:AVGO) announced its first-ever stock split (also 10-for-1) on June 12, effective July 15.
Nvidia’s powerful graphics processing units (GPUs) have quickly become the must-have chip for companies operating AI-accelerated data centers. Orders for the H100 GPU have swamped supply, allowing Nvidia to dramatically increase the price of these chips and increase adjusted gross margin.
Nvidia was responsible for 3.76 million of the total 3.85 million AI GPUs shipped in 2023, according to semiconductor analytics firm TechInsights. With first-mover advantages, a 98% market share and a long list of AI GPU successors (Blackwell and Rubin). ), Nvidia’s board gave every incentive to implement the company’s second split in three years.
As for Broadcom, it has become something of a staple of AI-accelerated networks. The company’s Jericho3 AI chip can connect up to 32,000 GPUs, harnessing their full processing capacity, reducing tail latency, and boosting the training of large language models and generative AI solutions.
Broadcom has also forged a handful of AI partnerships. Last year it collaborated with Alphabet to improve the cybersecurity of generative AI on Google Cloud. More recently, Broadcom has established a working relationship with Dell Technologies to provide the latter with the AI connectivity solutions its customers are looking for.
But it’s not just AI stocks that look primed for a stock split. What follows are the three most logical candidates to become the next stock split on Wall Street.
Costco Wholesale
The first stock that seems like a no-brainer to announce a split sooner or later is Warehouse Club Costco Wholesale (NASDAQ: COST). Not counting its spinoff from Price Enterprises in 1994, Costco has gone through three splits since becoming a publicly traded company, the last of which occurred in January 2000. When shares closed at an all-time high of nearly $856 on June 14, the stage is definitely set for a stock split.
Costco’s massive outperformance versus the benchmark S&P500 for several decades it comes down to the undeniable competitive advantages, the first of which is size. Buying its products in bulk can reduce the cost of each unit purchased. This allows it to undercut local stores and even national supermarket chains on price. The company’s management team learned long ago that price advantages attract consumers to its stores.
To further reinforce this point, Costco has been quite successful in getting its members to buy items that weren’t on their shopping lists. Although groceries have razor-thin margins, discretionary purchases tend to boost Costco’s operating margin.
The other advantage for Costco is its membership model. Paying $60 or $120 for an annual membership will encourage consumers and businesses to get the most out of their membership fee. In other words, they’re going to make Costco their one-stop destination whenever possible. The high-margin subscription revenue that Costco brings in buffers its razor-thin margins on groceries.
MicroStrategy
Another logical candidate to perform a stock split is a business analytics software provider MicroStrategy (NASDAQ:MSTR). MicroStrategy completed a 2-for-1 split in January 2000, but was forced to complete a 1-for-10 reverse split in July 2002 to ensure its continued listing on the US stock exchange. Nasdaq stock market after the bursting of the dotcom bubble. The company’s stock ended last week at nearly $1,496 per share.
Although MicroStrategy has analytics software, the lion’s share of its nearly $27 billion valuation is based on its ties to Bitcoin (CRYPTO: BTC). CEO Michael Saylor, who strongly believes that Bitcoin is the future, has overseen the acquisition of approximately 214,400 Bitcoin for his company. Based on a fully mined supply of 21 million tokens for Bitcoin, MicroStrategy owns more than 1% of the world’s largest cryptocurrency by market value.
The company also borders on being a meme stock. Most cryptocurrency-driven companies are heavily influenced by retail investors who are not overly focused on traditional fundamental valuation metrics. A share price approaching $1,500 could be limiting for retail investors who don’t have access to partial share purchases.
But unlike Costco, there are no competitive advantages at MicroStrategy. Despite being the largest publicly traded holder of Bitcoin, the company’s software sales have been on a downward trend for a decade.
Its valuation is even more worrisome. While approximately 214,400 Bitcoins have a current market value of $14.2 billion, MicroStrategy’s Bitcoin holdings are valued at a premium of almost 80%. Given Bitcoin’s shortcomings as a currency and investment, MicroStrategy is a potential stock split worth avoiding.
Metaplatforms
The third logical candidate to become Wall Street’s next stock split is the only member of the ‘Magnificent Seven’ who has never done a split: social media expert Metaplatforms (NASDAQ: META). Since going public in May 2012, Meta’s shares have risen more than 1,200%, with shares closing at more than $500 on June 14.
Meta’s outperformance has everything to do with its core social media “real estate.” It owns Facebook, the world’s most popular social media platform, as well as Instagram, WhatsApp, Facebook Messenger and Threads. Collectively, all its apps helped attract a whopping 3.24 billion daily active users in the quarter ended March. Companies are willing to pay an advertising premium to bring their message(s) to the attention of Meta’s broad audience.
In addition to fundamental ad revenue, Meta is also gaining ground for its AI ambitions. Meta’s money-losing Reality Labs segment is investing aggressively in virtual/augmented reality devices, the metaverse and AI solutions. While Reality Labs has been a drag on the bottom line, Meta CEO Mark Zuckerberg has a long and successful track record of developing new platforms and waiting until they mature to fully monetize them.
The final piece of the puzzle that explains Meta’s continued success is its abundant balance. Meta ended March with more than $58 billion in cash, cash equivalents and marketable securities, and has generated more than $76 billion in operating cash flow over the twelve-month period. There’s little reason to believe the stock won’t rise higher in the long term, which makes a stock split all the more sense.
Should You Invest $1,000 in Costco Wholesale Now?
Consider the following before buying shares in Costco Wholesale:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Costco Wholesale wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $808,105!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Suzanne Frey, a director at Alphabet, 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 and Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Bitcoin, Costco Wholesale, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom and Nasdaq. The Motley Fool has a disclosure policy.
Nvidia and Broadcom have each announced a stock split: these are the three most logical candidates to become Wall Street’s next stock split. originally published by The Motley Fool
