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Although there is something to do with it artificial intelligence (AI) has been capturing Wall Street’s attention for more than a year, there’s a strong argument to be made that the trend investors can’t get enough of right now is companies doing stock splits.
A stock split is a mechanism by which a publicly traded company can cosmetically change its stock price and the number of shares outstanding by the same factor. It is superficial in the sense that stock splits will not change a company’s market capitalization or affect operating performance in any way.
Stock splits come in two forms, one of which has a significantly better track record of making long-term investors richer. Reverse stock splits are intended to increase a company’s stock price, usually with the goal of ensuring the company remains listed on a major stock exchange.
Meanwhile, stock forward splits lower a company’s share price to make it more nominally affordable for investors who may not have access to fractional share purchases from their broker. Because forward splits are executed in a position of strength, often by companies that have outsmarted their peers, investors tend to do so.
Since the beginning of 2024 a dozen exceptional companies have announced and/or completed stock splits (asterisk indicates a completed split):
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Walmart (NYSE:WMT): 3-for-1*
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Nvidia (NASDAQ: NVDA): 10-for-1*
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Amphenol (NYSE: APH): 2-for-1*
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Chipotle Mexican Grill (NYSE: CMG): 50-for-1*
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Mitsui (OTC: MITSY)(OTC: MITSF): 2-for-1*
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Williams Sonoma (NYSE:WSM): 2-for-1*
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Broadcom (NASDAQ:AVGO): 10-for-1*
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MicroStrategy (NASDAQ:MSTR): 10-for-1
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Cintas (NASDAQ: CTAS): 4-for-1
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Sirius XM Holdings (NASDAQ: SIRI): 1-for-10
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Lam Research (NASDAQ:LRCX): 10-for-1
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Sony group (NYSE: SONY): 5-for-1
Among these tried-and-tested companies is a phenomenal stock split that’s begging to be bought in August, as well as two ultra-popular stock split stocks that should be avoided like the plague.
Stock split number 1 to absolutely avoid in August: Nvidia
Looking back, the first stock split to easily avoid in August (and likely beyond) is AI giant Nvidia. Nvidia’s historic 10-for-1 split was completed after the close of trading on June 7.
This is unlikely to be a popular opinion given Nvidia’s hardware dominance in AI-accelerated data centers. Semiconductor analytics firm TechInsights estimated Nvidia’s share of graphics processing units (GPUs) shipped for data centers in 2023 at a whopping 98%! With continued innovation — for example, the rollout of the Blackwell platform later this year and the expected debut of the Rubin GPU architecture in 2026 — Nvidia’s GPUs should have no problem maintaining their compute advantage.
But as I recently argued, compute advantage isn’t everything when it comes to AI-accelerated data centers.
From this year onwards, Nvidia will face competition for valuable ‘real estate’ in data centers with high computing power. Advanced micro devices And Intel are both rolling out and/or increasing production of their respective AI GPUs in the second half of 2024.
Additionally, Nvidia’s four largest customers by net revenue (all members of the “Magnificent Seven”) are developing AI chips for their respective data centers. This signals a clear desire from these leading customers to reduce their dependence on Nvidia’s hardware in the future. Even with compute advantages, the available “real estate” for Nvidia’s chips in data centers will decline.
History is not Nvidia’s friend either. Including the advent of the Internet some thirty years ago, there has been no breakthrough innovation, technology or trend in the past thirty years that has prevented an early bubble burst. In simpler terms, investors tend to overestimate the introduction and usefulness of new technologies. With most companies lacking a solid plan for their AI investments, it appears that AI is the next in a long line of next big bubbles.
Finally, Nvidia’s price-to-sales ratio over the past twelve months is roughly comparable to that of industry leaders Cisco systems And Amazon peaked before the dotcom bubble collapsed. History may not repeat itself with a “t,” but it does tend to rhyme with Wall Street.
Stock split #2 worth avoiding in August: MicroStrategy
A second stock split that is rife with warnings and should be absolutely avoided by investors this August (and long beyond) is AI-powered enterprise analytics software company MicroStrategy. MicroStrategy’s 10-for-1 forward split will take effect after the close of trading on August 7.
Although technically a software company, MicroStrategy claims to be the largest business owner of Bitcoin (CRYPTO: BTC), the world’s largest cryptocurrency by market value. As of June 20, MicroStrategy owned 226,331 Bitcoins, which is more than 1% of the 21 million tokens that will ever be mined.
While it is generally easier to buy shares of MicroStrategy through your broker than it is to buy Bitcoin on a cryptocurrency exchange, there are some downsides to this strategy.
The biggest problem with betting on the upside of MicroStrategy stock is that investors are grossly overvaluing their Bitcoin assets. As of this writing, a single Bitcoin costs $67,888, valuing MicroStrategy’s Bitcoin portfolio at nearly $15.4 billion. However, MicroStrategy’s market cap stands at a lofty $31 billion, suggesting that investors value their Bitcoin assets between $29 billion and $30 billion. Why pay $130,000 per Bitcoin token when you can buy it on an exchange for less than $68,000?
Another problem for MicroStrategy is that it finances its Bitcoin purchases with convertible debt offerings. Bitcoin is known for its steep bear markets, with losses exceeding 80%. If the world’s largest cryptocurrency goes into hibernation, there is once again no guarantee that MicroStrategy can meet its debt obligations.
I will also add that Bitcoin’s first-mover advantages are not what they once were. Other blockchain projects offer faster payments at significantly lower costs. It is essentially a first-generation network that has been surpassed by several third-generation projects.
To wrap it all up, MicroStrategy’s enterprise analytics software segment has seen revenue decline 14% over the past decade.
The phenomenal stock split that could be delivered in August: Sirius XM Holdings
On the other side of the coin is the cheapest stock of the twelve stocks begging to be bought in August. I’m talking about the only high-profile company that will do a reverse stock split in September (1 of 10): satellite radio operator Sirius XM Holdings.
Like any publicly traded company, Sirius XM navigates its way through various challenges. The biggest concern at the moment is an expected weakening of car sales in the second half of this year. Sirius XM relies on promotional users (through the purchase of new vehicles) to become self-paying subscribers. If the U.S. economy weakens or consumers show less interest in new vehicles, Sirius XM can expect the number of self-pay subscribers to slow or decline.
On the other hand, Sirius XM has history in its corner. Although economic downturns are normal and inevitable, they are mainly short-lived. Only three of the 12 US recessions since the end of World War II reached the 12-month mark. Long-winded expansions generally benefit the entertainment industry, including radio operators.
But what makes Sirius XM such an intriguing investment is its differences from traditional radio companies. While terrestrial and online radio operators generate nearly all of their revenue from advertising, Sirius XM generated less than 19% of its first-quarter revenue from advertising (via Pandora). On the contrary, it generated almost 78% of its revenue from subscriptions.
When an economic downturn does occur, or the winds of change begin to blow, it is not uncommon for companies to reduce their advertising spend. But it’s much less common for subscribers to cancel their service with Sirius XM. In other words, Sirius XM’s operating cash flow will fluctuate much less than its peers during periods of economic turbulence.
To further reinforce this point, it is the only licensed satellite radio operator. Because it is a legal monopoly, Sirius XM has strong pricing power, which it can use to stay ahead of the inflation curve.
The final piece of the puzzle is Sirius XM’s historically cheap valuation. Even with the stock market at one of its most expensive valuations in 153 years, shares of Sirius XM can be picked up for less than twelve times next year’s earnings. The icing on the cake is that thanks to your patience you also generate an annual return of 2.9%.
Should You Invest $1,000 in Nvidia Now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon, Intel and Sirius XM. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Bitcoin, Chipotle Mexican Grill, Cisco Systems, Lam Research, Nvidia, Walmart, and Williams-Sonoma. The Motley Fool recommends Broadcom, Cintas, and Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has one disclosure policy.
1 phenomenal stock split to buy by hand in August, and 2 to absolutely avoid was originally published by The Motley Fool