This has been another year of high-profile stock-split announcements, including Walmart, Chipotle Mexican Grill, and Lam Research. And while stock splits do not change the underlying fundamentals of a company, they can boost interest in stocks. Moreover, there is some research to suggest that stock-split stocks outperform the market.
Here are three stocks that have already split this year — Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO) — plus one more that may split sometime soon, Microsoft (NASDAQ: MSFT).
Nvidia’s sky-high valuation could be a warning sign
Jake Lerch (Nvidia): There’s no way to talk about stock-split mania without discussing Nvidia. Simply put, the stock market has gone gaga over Nvidia — taking the company from a market cap of $280 billion to over $3 billion in just under two years.
As a result of its skyrocketing stock price, Nvidia’s board of directors authorized a 10-for-1 stock split in May of this year, bringing the company’s stock price down from over $1,200 to around $120.
That stock split, like all common stock splits, did not change any of the company’s fundamentals. Similar to running a pizza cutter across a freshly baked pizza, a stock split simply divides what already exists into smaller, more manageable pieces; it doesn’t create more pizza.
Ultimately, investors need to pay attention to Nvidia’s fundamentals — now more than ever. To put it bluntly, the company’s stock is nearing levels that should give investors pause.
Take the stock’s price-to-sales (P/S) ratio, for example. Nvidia stock has a lifetime P/S ratio of 8.4x. That’s much higher than the average stock, which trades with a P/S ratio closer to 3x. However, within the tech industry, P/S ratios of 6 to 10 are common.
Yet, what is truly concerning is that Nvidia’s current P/S ratio isn’t anywhere close to that range — it’s 37x. Accordingly, investors today are paying about 4 times above its long-term historical P/S average.
So, even after Nvidia’s enormous revenue growth (company revenue has nearly tripled from $25 billion to $70 billion over the last two years), much of the rise of Nvidia’s stock is coming from investors paying higher prices. In short, investors are paying up for future growth and hoping that the company can meet — or beat — rising sales expectations.
That’s a risky proposition, meaning investors might want to look elsewhere for a better value.
Broadcom’s first-ever stock split could juice an already supercharged stock
Will Healy (Broadcom): Broadcom just executed its first stock split. The technology giant has dramatically benefited from artificial intelligence (AI), and its stock has increased by more than 80% over the last year. Despite those gains, it is not necessarily too late to buy.
Broadcom leverages AI in two ways. Its business-to-business chip solutions segment designs specialized semiconductors for its clients, and as such, it creates chips to support AI. Also, amid a growing enterprise software business, it can underpin a client’s software needs.
Those capabilities appeared to bolster its stock gains, particularly over the last year. That growth, in turn, likely prompted the 10-for-1 stock split it initiated on July 12.
Still, investors should remember that Broadcom has been a growth stock throughout its history. The former Avago Technologies launched its IPO at a split-adjusted price of just $1.50 per share in 2009. During that time, the stock price grew by more than 100-fold. So massive was its growth that its dividend, now at $2.10 per share annually, is 40% higher than the original IPO price!
Despite such increases, investors have to look past a critical financial metric. In the first six months of fiscal 2024 (ended May 5), net income of $3.4 billion dropped 53% yearly. That may deter investors, especially since that contributed to the P/E ratio rising to 69.
Admittedly, the high P/E ratio makes it expensive, and the stock is likely not invulnerable to a downturn should market sentiment change.
However, investors should keep in mind that revenue rose 39% yearly over the same period, and the company used some of the revenue increase to invest in itself when it increased operating expenses by 150%. Such actions could increase profits in the long term, taking the stock price higher over time.
Additionally, the split could help as the lower nominal price makes whole shares more affordable, a factor that should add to its considerable long-term gains.
Tech giant Microsoft is becoming an increasingly obvious stock-split candidate.
Justin Pope (Microsoft): Tech giant Microsoft hasn’t split its stock in recent memory, but that could soon change. The company frequently split during the 1990s until the infamous dot-com bubble popped in 2000. Shares plunged and took nearly two decades to recover.
But Microsoft has now risen to levels few may have predicted. Technologies like cloud computing and artificial intelligence have continued to fuel non-stop growth over the past decade:
Now, shares are much higher than they were years ago. Investors and employees sitting on massive investment returns from holding stock may not want to sell in $400 to $500 increments. A stock split would lower the share price and give them some flexibility. It would also make it easier for those buying stock to build a position without having a lot of money for big purchases.
A potential stock split may become more sensible over time. Analysts believe Microsoft will grow earnings by an average of over 16% annually for the next three to five years. The stock trades at a forward P/E ratio of 34, which is reasonable considering Microsoft’s anticipated growth.
The bottom line?
Shares are poised to climb higher on strong earnings growth over the coming years, so a split only makes sense. Investors should keep Microsoft on their radar as the next potential stock split.
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Jake Lerch has positions in Nvidia. Justin Pope has no position in any of the stocks mentioned. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Lam Research, Microsoft, Nvidia, and Walmart. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Stock-Split Fever: 2 Recent Stock-Split Stocks and 1 That Could Be Next was originally published by The Motley Fool
Source: finance.yahoo.com