Although the artificial intelligence (AI) revolution has captivated Wall Street, don’t overlook just how much of a catalyst companies enacting stock splits have been since the year began.
A stock split provides a path for a publicly traded company to cosmetically alter its share price and outstanding share count. Splits are superficial in the sense that they have no effect on a company’s market cap or operating performance.
Stock splits come in two forms, forward and reverse, with investors undeniably favoring the former. With a forward-stock split, a public company is angling to make its shares more nominally affordable for retail investors. Meanwhile, a reverse-stock split is designed to increase a company’s share price, which is usually done to ensure it meets the minimum listing standards of a major stock exchange. Since reverse splits are usually enacted in a position of weakness, investors typically flock to companies conducting forward-stock splits.
Since 2024 began, around a dozen high-profile, time-tested businesses have announced and/or completed respective stock splits. While many of these stock-split stocks are well-positioned to deliver for their long-term shareholders, this isn’t the case across the board.
A combination of mounting headwinds and otherworldly valuation make the following three premier stock-split stocks wholly avoidable in the second half of 2024.
Nvidia
The first stock-split stock that I wouldn’t touch with a 10-foot pole for the remainder of the year, and perhaps well beyond, is the hardware kingpin of the AI revolution, Nvidia (NASDAQ: NVDA). Nvidia’s board announced a 10-for-1 forward split on May 22, which went into effect following the close of businesses on June 7.
Despite being no fan of Nvidia’s stock at its current valuation, I’ll absolutely give credit where credit is due. The company’s operating ramp has been virtually textbook and will likely be discussed in classrooms and on Wall Street for decades to come.
Nvidia’s graphics processing units (GPUs) also have a practical monopoly in AI-accelerated data centers. The analysts at TechInsights pegged Nvidia’s share of the 3.85 million AI-GPUs shipped in 2023 at (drumroll)… 98%!
The problems I have with Nvidia boil down to history, competition, and valuation.
With regard to the former, there hasn’t been a game-changing innovation, technology, or trend for three decades that didn’t endure an early innings bubble. While predicting when the euphoria will end is impossible, history is undefeated when it comes to investors overestimating the adoption and utility of new innovations.
Secondly, Nvidia is contending with its first real bouts of AI-data center competition from the likes of Intel and Advanced Micro Devices. Further, its four biggest customers by net sales are developing AI-GPUs for use in their data centers. Even if Nvidia’s hardware remains superior to its competition, the presence of these externally and internally developed chips all but ensures less space in enterprise data centers for Nvidia’s GPUs. It also likely marks an end to Nvidia’s otherworldly pricing power for its AI-GPUs.
Lastly, Nvidia’s trailing-12-month (TTM) price-to-sales (P/S) ratio is the stuff horror movies are made of. As of the closing bell on July 12, Nvidia was valued at 40 times TTM P/S, which is more or less in line with the peak TTM P/S ratios for Cisco Systems and Amazon prior to the bursting of the dot-com bubble. Though it’s impossible to pinpoint when a bubble will burst, all signs continue to point to Nvidia’s stock being in one.
MicroStrategy
A second high-flying stock-split stock that I’d suggest avoiding like the plague for the second half of 2024 is AI-driven enterprise analytics software company MicroStrategy (NASDAQ: MSTR). MicroStrategy’s board declared a 10-for-1 forward split on July 11, with an effective date of August 7, following the close of trading.
While MicroStrategy has had a software division for decades, it’s best-known as the company that holds the most Bitcoin (CRYPTO: BTC), the world largest cryptocurrency by market value. A June 20 update from the company showed that it held 226,331 Bitcoin, or 11,931 more tokens than it previously held as of the end of April. This represents more than 1% of the 21 million Bitcoin that will ever be mined.
While investors — and MicroStrategy’s CEO Michael Saylor — are clearly excited about Bitcoin’s future, there are some key reasons why this stock-split stock is worth avoiding.
To begin with, Bitcoin has lost the first-mover luster that once made it desirable. It’s nowhere close to being the fastest or cheapest way to make digital payments; nor is it particularly scarce, with lines of computer code and community consensus being the only things standing in the way of a higher token count.
Bitcoin’s real-world use case is lacking, too. Despite the repeated efforts of El Salvador’s government to encourage the use of Bitcoin as legal tender, 88% of residents didn’t use it as a form of payment in 2023.
But the biggest issue with MicroStrategy might just be the premium investors have attached to its stock. As of this writing on July 12, Bitcoin was trading at $57,853 per token. This works out to about $13.1 billion in market value for MicroStrategy’s Bitcoin assets. However, investors have placed in the neighborhood of a $10 billion premium on the company’s assets. Put another way, instead of buying Bitcoin for $57,853 per token on a crypto exchange, investors in MicroStrategy are paying close to $100,000 per Bitcoin, based on its assets.
The nail in the coffin is that MicroStrategy’s Bitcoin holdings have been financed by multiple convertible-debt offerings. If Bitcoin enters another steep bear market, there are no assurances the company will be able to meet its hefty debt obligations.
Chipotle Mexican Grill
The third premier stock-split stock I wouldn’t touch with a 10-foot pile in the second half of 2024 is high-flying fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG). Chipotle’s board approved a historic 50-for-1 stock split on March 19, which went into effect after the close of trading on June 25.
Similar to Nvidia, I’m not oblivious to the variety of ways Chipotle has out-innovated and out-executed its competition. Chipotle’s promise to use responsibly raised meats and (when possible) locally sourced vegetables has led to a loyal customer base that’s willing to pay a premium price for its food.
Furthermore, Chipotle’s addition of mobile order drive-thru lanes, known as “Chipotlanes,” has been a game-changer. These digital order lanes, coupled with the company purposely keeping its menu small, have improved internal operating efficiency in its restaurants.
The concerns I have with Chipotle primarily revolve around its valuation.
Although I just talked up how the company’s Chipotlanes have lifted its organic growth prospects, there’s only so much innovation that can be expected from restaurant chains. While sales jumped 14.1% for the company during the first quarter, roughly half of this gain was the result of opening new restaurants.
Digging into the proverbial burrito reveals comparable-restaurant sales growth of “only” 7%, of which 1.6% was the result of an increase in average check size. Though pricing power is an important aspect of any solid business, inflationary price hikes aren’t worth a significant premium. As of the closing bell on July 12, investors were paying 43 times forward-year earnings for this 7% organic growth rate.
To add to this point, the stock market as a whole is at one of its priciest valuations when looking back more than a century. The S&P 500‘s Shiller price-to-earnings ratio is north of 36, which has historically been a signal that a bear market is coming. When the next sizable stock market correction does arrive, companies with premium valuations, like Chipotle, MicroStrategy, and Nvidia, are liable to be hit the hardest.
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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 and Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Bitcoin, Chipotle Mexican Grill, Cisco Systems, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
3 Premier Stock-Split Stocks I Wouldn’t Touch With a 10-Foot Pole in the Second Half of 2024 was originally published by The Motley Fool
Source: finance.yahoo.com