Although all eyes are seemingly on the rise of artificial intelligence (AI), the hottest trend on Wall Street just might be companies conducting stock splits.

A stock split is an event that permits publicly traded companies to alter their share price and outstanding share count. Keep in mind that these adjustments are purely cosmetic and have no impact on a company’s market cap or its underlying operating performance.

An up-close view of the word, Shares, on a paper stock certificate of a publicly traded company.

Image source: Getty Images.

There are two types of stock splits, albeit one is far more popular than the other. The first variety is a forward-stock split, which is aimed at reducing a company’s nominal share price to make it more affordable for retail investors. The other flavor of stock split is a reverse split. As its name suggests, a reverse-stock split is designed to increase a company’s share price, often with the purpose of ensuring continued listing on a major stock exchange.

Since 2024 began, about a dozen high-flying and/or brand-name businesses have announced a stock split. Far and away, most investors have gravitated to businesses completing forward-stock splits. Companies whose shares have risen to the point where a stock split becomes needed are often out-innovating and out-executing their peers.

Although companies conducting stock splits have historically outperformed the benchmark S&P 500 in the 12 months following an initial split announcement, not all stock-split stocks are worth buying.

Wall Street’s newest member of this exclusive club is a perfect example of a company that should be avoided by investors at all costs.

July has been a busy month for stock-split stocks

Between stock-split announcements and effective dates, July has been a busy month.

It kicked off with one of Warren Buffett’s “forever” holdings at Berkshire Hathaway completing an under-the-radar 2-for-1 stock split on July 1. Japan-based trading house Mitsui (OTC: MITSY)(OTC: MITSF) has its proverbial fingers in many critical sectors and industries within Japan’s economy, including oil and gas operations, manufacturing, and food production. Mitsui also has a very shareholder-friendly operating structure that now includes up to $1.3 billon in share buybacks (through September 20).

This was followed by home furnishings stock Williams-Sonoma (NYSE: WSM) completing a 2-for-1 stock split after the close of business on July 8. Inclusive of dividend payments, shares of Williams-Sonoma have skyrocketed by more than 43,000% since its initial public offering (IPO) in 1983.

Although shares of Williams-Sonoma are pricier than they’ve been in recent years, the company has developed a competitive niche that targets middle-and-upper-income consumers and relies on e-commerce to keep overhead costs down.

Until July 11, the newest stock-split stock on Wall Street had been AI networking solutions specialist Broadcom (NASDAQ: AVGO). Broadcom’s 10-for-1 stock split became effective after the closing bell on Friday, July 12, with the company opening at its split-adjusted price as of this morning (July 15).

Broadcom has embraced the demand wave for AI by providing networking solutions that reduce tail latency in high-compute data centers and maximize the compute capacity of AI graphics processing units.

Furthermore, Broadcom is one of the leading providers of wireless chips and accessories found in next-generation smartphones. Wireless companies upgrading their networks to support 5G speeds have encouraged a device-replacement cycle that’s kept Broadcom’s backlog bloated.

While its forward earnings multiple is notably pricier than its years past, Broadcom has the tools to deliver for patient investors.

A visibly worried person looking at a rapidly rising then plunging stock chart that's displayed on a tablet.

Image source: Getty Images.

Wall Street’s newest stock-split stock may plummet in the coming years

Whereas Mitsui, Williams-Sonoma, and Broadcom have the tools and intangibles to be fine long-term investments, the same can’t be said for the newest member of the stock-split club: AI-powered enterprise software analytics company MicroStrategy (NASDAQ: MSTR).

On July 11, MicroStrategy’s board gave the green light for a 10-for-1 stock split, which will become effective following the close of business on August 7. Based on its closing price on July 11, this split will reduce MicroStrategy’s share price to around $136, while increasing its outstanding share count by a factor of 10.

This move makes a lot of sense and is something I’ve been expecting. Though MicroStrategy has a decade’s-old software division, it’s best-known for being the largest publicly traded corporate holder of Bitcoin (CRYPTO: BTC). Since the end of April, CEO Michael Saylor and his team have overseen the acquisition of 11,931 additional Bitcoin, which brings MicroStrategy’s total holdings to 226,331 tokens. Keep in mind that only 21 million Bitcoin will ever be mined.

With retail investors and social media hype being the core drivers for cryptocurrencies, it made total sense for MicroStrategy’s board to make its stock more affordable for everyday investors who might not have access to fractional-share purchases through their broker. In fact, the company’s board specifically noted that this split is to “make MicroStrategy’s stock more accessible to investors and employees.”

The issue for MicroStrategy is that the bulk of its $24 billion market cap isn’t built on anything tangible.

While Bitcoin once had first-mover advantages in the crypto arena, it’s been left in the technological dust by multiple next-generation blockchain projects. Bitcoin is nowhere near the fastest nor cheapest when it comes to transaction validation and settlement.

To add to this point, El Salvador’s experiment with Bitcoin as a legal tender has predominantly been a flop. According to a survey conducted by the University of Central America’s Public Opinion Institute, a whopping 88% of El Salvadorians didn’t use Bitcoin in 2023, despite the government’s push for adoption. Reality has shown that Bitcoin offers little real-world utility or scarcity.

Moreover, MicroStrategy’s Bitcoin assets are valued at a significant premium to the current price of Bitcoin. The 226,331 tokens currently held by MicroStrategy are worth about $12.98 billion, as of this writing ($57,347/Bitcoin). However, MicroStrategy’s $24 billion market cap, assuming a reasonable valuation of $1 billion to $2 billion for the software operations, implies a $22 billion to $23 billion valuation for the Bitcoin assets. In other words, investors are paying $97,200 to $101,600 per Bitcoin when purchasing shares of MicroStrategy when they could just buy Bitcoin on a cryptocurrency exchange for $57,347 per token.

The cherry on top is that MicroStrategy has been financing its leveraged Bitcoin strategy by issuing convertible debt. If Bitcoin were to plummet, as it’s done numerous times before over the last decade, MicroStrategy might be forced to drown its investors in new shares to cover its debt obligations.

With its software business shrinking — annual sales are down 14% over the last 10 years — and its valuation built on a house of cards, MicroStrategy is a stock-split stock to avoid like the plague.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Bitcoin, and Williams-Sonoma. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Wall Street’s Newest Stock-Split Stock Should Be Avoided Like the Plague — and I’m Not Talking About Broadcom was originally published by The Motley Fool

Source: finance.yahoo.com