Although artificial intelligence (AI) is drawing a lot of attention, it can be argued that stock splits are the hottest trend on Wall Street right now.
A stock split is a tool publicly traded companies can lean on to cosmetically alter their share price and outstanding share count by the same factor. I say “cosmetically,” because stock splits have no effect on a company’s market cap or its operating performance.
Public companies can enact two types of stock splits: Forward and reverse. With a forward-stock split, a company is aiming to reduce its nominal share price to make it more affordable for everyday investors. Meanwhile, the goal of a reverse-stock split is to increase a company’s share price, usually with the purpose of ensuring continued listing on a major stock exchange.
Since forward-stock splits are being executed from a position of operating strength, this is the type of split most investors tend to focus on.
Furthermore, a Bank of America Global Research study found that companies enacting forward splits gained an average of 25.4% in the 12 months after announcing their split (since 1980), which is more than double the 11.9% average return for the benchmark S&P 500 over the same timeline. This outperformance isn’t lost on Wall Street institutions or their analysts.
During the first half of 2024, nine prominent businesses announced and/or completed stock splits, eight of which were of the forward split variety. According to high-water price targets from select Wall Street analysts, three of these stock-split stocks could skyrocket by as much as 130% over the coming year.
Nvidia: Implied upside of 62%
The first stock-split stock that could ascend to the heavens, at least based on the prediction of one Wall Street analyst, is AI titan Nvidia (NASDAQ: NVDA). Nvidia announced a 10-for-1 stock split on May 22, which became effective after the market closed on June 7.
Adjusted for the company’s recent split, Rosenblatt analyst Hans Mosesmann slapped a $200 price target on shares of Nvidia, which represents up to 62% upside from where shares closed on June 28. If Mosesmann’s price target proves correct, Nvidia’s market cap would rise to nearly $5 trillion.
Mosesmann’s optimism boils down to two key drivers. The first involves Nvidia’s dominant market share of AI-inspired graphics processing units (GPUs) used in high-compute data centers. Semiconductor analysis firm TechInsights estimates that Nvidia accounted for 98% of the 3.85 million AI-GPUs shipped last year. Nvidia’s next-generation AI-GPU architecture, including Blackwell and Rubin, should help it sustain its compute advantages.
The other key driver in the eyes of Mosesmann is Nvidia’s software. In particular, his lofty price target points to the success of Nvidia’s CUDA platform, which is the toolkit that helps developers learn how to build large language models. Since CUDA and AI-accelerated GPUs go hand-in-hand, Nvidia has itself a high-margin one-two punch.
Unfortunately, history hasn’t been kind to next-big-thing innovations over the last three decades. Not one game-changing innovation or technology has avoided an early stage bubble-bursting event, and AI is unlikely to be the exception.
What’s more, Nvidia has competition coming at it from all angles. In addition to external competition, which will likely chip away at its dominant AI-GPU share, the company’s top four customers by net sales are all developing their own AI-GPUs. In short, we’re likely witnessing a peak in pricing power and demand for Nvidia’s chips.
Chipotle Mexican Grill: Implied upside of 28%
A second stock-split stock that has the necessary tools and intangibles to soar is fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG). Chipotle’s board gave the green light to the company’s first-ever split on March 19, with the company effecting its historic 50-for-1 forward split after the market closed on June 25.
Chipotle’s biggest Wall Street cheerleader is Bernstein analyst Danilo Gargiulo, who set an $80 price target on the company. If Gargiulo’s forecast is correct, shareholders would be looking at an additional 28% upside from where the stock ended on June 28.
Gargiulo’s long-term optimism for Chipotle is focused on a number of catalysts at the company’s disposal. Specifically, Gargiulo’s recent note spoke of the company’s strong ties to Generation Z and its ability to engage with these consumers via digital platforms. Furthermore, he believes the company can lean on its loyalty program to boost higher-margin digital sales.
There’s little question that Chipotle Mexican Grill’s management team knows its customer base well. By using responsibly raised meats and prepping its food daily in its restaurants, management discovered a long time ago that people will gladly open their wallets and absorb inflationary price hikes.
Additionally, Chipotle’s rather limited menu has served as a source of growth. Keeping its menu small allows its workers to prep meals quickly, which helps ensure that lines in its stores are continually moving.
But at some point, valuation comes into play. Although Chipotle’s sales growth has consistently outpaced its peers, the company’s comparable restaurant sales growth from existing locations clocked in at only 7% in the first quarter. While this is a fantastic number when compared to its competition, it doesn’t come close to justifying a forward price-to-earnings (P/E) ratio of nearly 47.
Sirius XM Holdings: Implied upside of 130%
The third stock-split stock that can absolutely skyrocket, based on the lofty price target of one Wall Street analyst, is satellite radio operator Sirius XM Holdings (NASDAQ: SIRI).
On June 17, a filing with the Securities and Exchange Commission noted that Sirius XM plans to enact a 1-for-10 reverse split when it merges with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. This merger, which’ll create a single shareholder base, is expected to take place during the third quarter. This also makes Sirius XM the only high-profile company of the nine stock-split stocks in 2024 that isn’t conducting a forward split.
The chief bull in Sirius XM’s camp is Benchmark analyst Matthew Harrigan. Although Harrigan lowered his firm’s price target on Sirius XM in March by $0.50 per share, his $6.50 target still implies up to 130% upside, based on where shares closed on June 28.
The challenge Sirius XM faces at the moment is the prospect of weaker auto sales. Sirius XM counts on new vehicle purchases to turn promotional users into self-pay subscribers. If the U.S. economy weakens and/or auto sales taper, this conversion to self-pay subscribers can slow, or even temporarily shift into reverse.
Despite this concern, Sirius XM Holdings has a couple of well-defined competitive advantages that make it highly attractive from an investment standpoint.
As the lone satellite radio operator, the company possesses reasonably strong subscription pricing power. This helps ensure that Sirius XM can outpace prevailing inflationary pressures.
Sirius XM’s sales channels also give it a clear-cut edge when compared to terrestrial and online radio operators. Whereas traditional radio operators rely heavily on ads for a majority of their revenue, Sirius XM generated about 78% of its net sales from subscriptions during the first quarter. Since subscribers are less likely to cancel their service than businesses are to pare back their ad spending during a downturn, Sirius XM is better suited to navigate economic uncertainty.
Sirius XM Holdings is also the cheapest stock-split stock — and it’s not even close. Shares of the company can be grabbed right now for less than 9 times forward-year earnings, which represents its lowest forward P/E ratio since going public in 1994.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America and Sirius XM. The Motley Fool has positions in and recommends Bank of America, Chipotle Mexican Grill, and Nvidia. The Motley Fool has a disclosure policy.
3 Stock-Split Stocks That Can Skyrocket Up to 130%, According to Select Wall Street Analysts was originally published by The Motley Fool
Source: finance.yahoo.com