Although Wall Street is firmly in the grip of a bull market, this decade has been anything but predictable. The first four years saw the Dow Jones Industrial Average, S&P500And Nasdaq Composite alternating bear and bull markets in consecutive years.
When volatility and uncertainty arise on Wall Street, investors typically look for cover in proven companies with a history of outperformance. The ‘FAANG stocks’ are an example of a group of outperforming companies that investors have flocked to. But in recent years, it’s the companies that implement stock splits that have received even more attention.
A ‘stock split’ is nothing more than a cosmetic event that allows a publicly traded company to change its share price and the number of shares outstanding at the same rate. A stock split has no effect on a company’s market capitalization or operating performance.
Stock splits come in two forms: forward and reverse. The purpose of a forward-stock split is to make shares more nominally affordable for ordinary investors, especially those who may not have access to purchasing fractional shares from their broker. By comparison, a reverse stock split increases a publicly traded company’s stock price to ensure continued minimum listing standards are met.
Not for small companies that do reverse stock splits, as there have been some big winners in the long run, but most investors rightly focus on companies that do forward stock splits. Companies that complete a forward split tend to innovate better and outperform the competition.
Since the start of 2024, more than a half-dozen high-profile companies have announced or completed a stock split. However, not all of these stock splits have the same prospects.
Based on the high-water price targets of select Wall Street analysts, the following three stock splits offer as much as 30% upside potential over the next year.
Nvidia: implicit advantage of 29%
The first stock split that offers scorching hot potential is nothing short of the infrastructure backbone of the artificial intelligence (AI) movement. Nvidia (NASDAQ: NVDA). Nvidia completed a 10-for-1 forward split last Friday, June 7, and will begin trading at the split-adjusted price this morning (June 10).
The highest price target for Nvidia shares comes courtesy of bank of America Securities senior semiconductor analyst Vivek Arya. Arya and his team recently raised their company’s price target for the AI titan from $1,320 to $1,500 ($150 on a split-adjusted basis), which, if accurate, implies an additional 29% upside for the coming year. It would also add another $840 billion to Nvidia’s valuation and increase its market cap to about $3.7 trillion.
Arya’s optimism about Nvidia stems from his and his team’s belief that Nvidia will benefit immensely as companies shift their focus to AI-accelerated data centers. In a recent interview with Yahoo! Finance where Arya defended his $1,500 price target, he suggested companies could spend $250 billion to $500 billion annually on AI-accelerated data centers.
Nvidia is undeniably benefiting from overwhelming demand for its powerful H100 graphics processing units (GPUs). Nvidia’s superior chips account for approximately 90% of all GPUs currently deployed in AI-accelerated data centers, training large language models and overseeing generative AI solutions.
But as I opined last week, Wall Street’s hottest mega-cap stocks may be peaking. While it seems Nvidia can do no wrong, the company is poised to face external growth internal competition. Regarding the latter, Nvidia’s four largest customers (which make up about 40% of net sales) are all developing their own AI chips. This makes it likely that we’ll witness a spike in orders for Nvidia’s powerful GPUs from America’s most influential companies.
Furthermore, history is undefeated when it comes to next-big-thing innovations. Over the past thirty years, investors have consistently overestimated the introduction of new technologies and innovations. AI and Nvidia are unlikely to break this trend.
Sony Group: implicit advantage of 26%
A second stock split that could rise, based on a Wall Street expert’s prediction, is a consumer electronics company Sony group (NYSE: SONY). Sony first announced its plan to do a 5-for-1 forward split on May 14. For the company’s US American Depositary Receipts (ADRs), shares will trade at their split-adjusted price from October 8, 2024.
Wall Street’s top Sony bull is Martin Yang of Oppenheimer. Yang expects the Japanese electronics company’s shares to reach $108, which would represent a 26% increase over the next year.
Aside from the positive connotations that have come with the stock split in recent years, Yang’s optimism likely has to do with a combination of growth in Sony’s higher-margin gaming services, sensor imaging segment and its strengthened capital return program.
While sales of Sony’s PlayStation 5 gaming console have declined somewhat, which is to be expected after 3.5 years on the market, the company is enjoying a surge in revenue from PlayStation Plus subscriptions. PlayStation Plus allows subscribers to game with their friends and save their game saves to the cloud.
Sony is also a notable supplier of image sensors in next-generation smartphones. The 5G revolution has driven a constant cycle of device replacement, increasing demand for Sony’s image sensors.
In addition to announcing a 5-for-1 stock split in May, the company’s board of directors approved a stock buyback program that could total as many as 30 million shares (post-split). This would amount to almost 2.5% of the outstanding shares. For companies with stable or growing net income, buybacks can provide a modest boost to earnings per share (EPS).
Lam Research: implicit advantage of 30%
But the “Class of 2024” stock with the most upside, based on a lofty price forecast from a Wall Street analyst, is a semiconductor wafer company. Lam Research (NASDAQ:LRCX). Lam’s board approved a 10-to-1 forward split on May 21, with the company expected to trade at the split-adjusted price before the opening bell on October 3, 2024.
Wall Street’s most bullish analyst on Lam Research is Mark Lipacis, the senior managing director of semiconductor and capital equipment companies at Evercore ISI. In April, Lipacis placed a $1,200 price target on Lam’s stock, suggesting the shares could rise as much as 30% over the next year.
The most logical reason for investors to be bullish on Lam Research is its ties to artificial intelligence. The boom in AI spending is accelerating demand for packaging high-bandwidth memory (HBM), which is quickly becoming a staple in high-compute data centers. HBM enables faster data access with lower energy consumption. As Nvidia’s AI chips proliferate, it’s wafer fabrication companies like Lam Research that reap the rewards.
Similar to Sony Group, Lam’s board of directors also recently announced a share buyback program. The $10 billion the board approved for buybacks could reduce Lam’s outstanding share count by more than 8% if fully implemented at the current share price of nearly $923.
But there are also reasons to be skeptical about significant gains in a stock that has already skyrocketed. For example, US regulators have restricted the export of AI-focused wafer production equipment to China. Reduced orders from the world’s second-largest economy by gross domestic product put a very clear ceiling on Lam’s near-term growth potential.
I also reiterate that history has repeatedly been unkind to the next big trends. If investors once again overestimate the adoption of a new innovation, the companies with the most direct AI ties, such as Nvidia and Lam Research, will be hit hardest.
A final reason to be skeptical about Lam reaching a $1,200 share price is its valuation. After trading at an average price-to-earnings (P/E) ratio of 17 for the past five years, Lam Research currently has a price-to-earnings ratio closer to 26. That’s quite a premium for a notoriously cyclical economy. company.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions at Bank of America. The Motley Fool holds positions in and recommends Bank of America, Lam Research, and Nvidia. The Motley Fool has a disclosure policy.
3 Stock Splits That Could Rise Up to 30% According to Select Wall Street Analysts Originally published by The Motley Fool
