Wall Street and investors have been fixated on the artificial intelligence (AI) revolution for the past two years. But what they may not realize is how important the stock split euphoria has been in propelling Wall Street’s major indexes higher through 2024.
A stock split is a tool that publicly traded companies have at their disposal that allows them to superficially adjust their share price and the number of outstanding shares by the same factor. Splits are superficial in the sense that they do not change a company’s market capitalization or in any way affect its underlying operating performance.
Splits come in two varieties, one of which is an undeniable favorite among investors. Reverse stock splits are designed to increase a company’s stock price, often with the goal of maintaining minimum listing standards for a major stock exchange. Because this is the type of split undertaken by struggling companies, it is one that investors tend to avoid.
On the other hand, investors get excited about forward stock splits. A forward split lowers a company’s stock price to make it nominally more affordable for ordinary investors who don’t have access to fractional share purchases through their broker. This type of split is almost always done by companies with a rich history of outperforming their competitors.
There have been just over a dozen notable stock splits announced or completed in 2024, all but one of which is a forward split.
Wall Street is flocking to AI stock splits
With AI stocks in the spotlight, it’s no surprise that three of the year’s most notable Wall Street splits are tied to this much-vaunted trend:
-
Nvidia (NASDAQ: NVDA) completed a historic 10-for-1 forward split in June.
-
Broadcom (NASDAQ: AVGO) closed a 10-for-1 split (the very first) in mid-July.
-
Supermicrocomputer (NASDAQ: SMCI) will implement a 10-for-1 split after the close of trading on September 30.
Nvidia is the flagship of the rise of AI and is reportedly the most decorated of all stock splits in 2024. The company’s shares have surged more than 675% since the start of 2023 due to the dominance of its graphics processing units (GPUs) in AI-accelerated data centers – an estimated 98% share of GPUs shipped to data centers in 2022 and 2023, according to TechInsights. Demand for its H100 GPU has been lagging, leading to exceptional pricing and a significant increase in the company’s gross margin.
Broadcom has quickly become the preferred choice in networking solutions for high-compute data centers. Its solutions are responsible for reducing tail latency and maximizing GPU computing power in enterprise data centers that train large language models, run generative AI solutions, and make split-second decisions. While Broadcom is much more than an AI stock, AI is the source of excitement around the company right now.
As for Super Micro Computer, it has become one of the leading infrastructure providers of the AI ​​revolution. Super Micro’s customizable rack servers, which feature Nvidia’s H100 GPUs, are in high demand—the company’s net sales increased 110% last year—as companies seek to create first-mover advantages.
But while AI stocks dominated Wall Street in 2024, another well-known company is perfectly positioned to announce a stock split and steal the show in the fourth quarter.
This may be the most anticipated stock split of the fourth quarter
The stock in question that could send Wall Street into a frenzy if it announces a forward split later this week is none other than Warehouse Club Costco Wholesale (NASDAQ: COST).
Costco is expected to report its fiscal fourth quarter operating results after the close of business on Sept. 26, which would be an ideal time to also announce a stock split.
As of the close of business on September 18, a single share of Costco stock was worth more than $892. More importantly, the company has only done three splits since going public, the last of which occurred in January 2000. In other words, it seems high time to make stock more affordable for individual investors and employees who want to participate in the company’s employee stock ownership plan.
The only logical reason Costco has avoided a split for so long — other than the greater prevalence of fractional-share purchasing options through most online brokers — is that approximately 72% of its shares are held by institutional investors who don’t care about a high notional share price. But at some point, a share price of nearly $900 becomes burdensome to its employees and/or everyday investors. I believe we’ve reached that point with Costco.
In addition, Costco’s valuation is at an all-time high. It is currently trading at a multiple of 50 (Yes50!) times earnings per share over the next year, which is virtually unheard of for a retailer. The company needs serious buzz if it wants to grow to its current valuation, and the first stock split in 24 years could be just what the doctor ordered.
Unmasking Costco’s recipe for success
While it appears undeniably that Costco Wholesale will impress Wall Street with a stock split, the company’s underlying businesses remain running at full speed.
Costco’s recipe for success begins with the advantage it has through its sheer size. By being able to buy products in bulk, the per-unit cost of each item can be lowered. Ultimately, this allows the company to undercut local stores and national grocery chains on price and offer consumers a value proposition that keeps them coming back.
Costco is also a consumer products company. This means that it sells a variety of basic necessities that consumers will buy regardless of how well or poorly the U.S. economy is doing, such as food, beverages, and household cleaning/hygiene products. It has a lure to drive traffic to its stores in any economic climate.
Another key ingredient in Costco’s success story is its membership-based business model. The $65 and $130 annual fees that Costco collects from its members are high-margin and flow directly into its profits. These fees provide an even stronger margin cushion that allows the company to undercut its competitors on price to drive membership growth.
Last but not least, paying for an annual membership typically encourages shopper loyalty. Consumers want to get the most out of their membership, and are therefore more likely to go to Costco for their big purchases. Getting consumers into stores is half the battle — and Costco has been winning at that for decades.
Should You Invest $1,000 in Costco Wholesale Now?
Before you buy stock in Costco Wholesale, here are some things to consider:
The Motley Fool Stock Advisor team of analysts 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 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $710,860!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of September 16, 2024
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 recommends Broadcom. The Motley Fool has a disclosure policy.
Wall Street’s most anticipated fourth-quarter stock split could be announced this week. Originally published by The Motley Fool
