One of the most intriguing developments for investors over the past few years is the return to popularity of stock splits. While the practice was commonplace in the late 1990s, it had fallen out of favor but has enjoyed a resurgence over the past several years. This corporate action is usually taken in response to years of strong operating and financial results, which ultimately drive a thriving stock price.
History suggests that top-performing businesses tend to continue firing on all cylinders. Companies that conduct forward stock splits generate share price increases of 25%, on average, in the year following the announcement, compared with average gains of 12% for the S&P 500, according to data compiled by Bank of America analyst Jared Woodard.
Here are three stock-split stocks with room to run, according to certain Wall Street analysts.
Broadcom: Implied upside 76%
The first stock-split stock with a lot of potential upside growth is Broadcom (NASDAQ: AVGO). The company occupies an enviable position in technology circles, supplying a wide range of software, semiconductor, and security offerings spanning the cable, broadband, mobile, and data center spaces. Broadcom says that “99% of all internet traffic crosses through some type of Broadcom technology,” giving it a critical position in the ongoing artificial intelligence (AI) revolution.
Recent results show that business is booming. In the second quarter, revenue of $12.5 billion climbed 43% year over year, fueling adjusted earnings per share (EPS) of $10.96, which grew 6%. It’s worth noting the recent acquisition of VMWare is weighing on the company’s profit margin, which management expects to normalize by 2025. The company expects its strong growth to continue, raising its full-year revenue forecast to $51 billion, which would represent growth of 42%.
Its history of execution and robust growth led to Broadcom’s 10-for-1 stock split, which took place in mid-July. Despite gains of 152% since early last year, many on Wall Street remain incredibly bullish. Just ahead of the split last month, Rosenblatt analyst Hans Mosesmann reiterated his buy rating and boosted his price target to a split-adjusted $240, which represents a potential upside for investors of 76% compared to Wednesday’s closing price.
The analyst believes the accelerating adoption of generative AI will fuel greater sales of AI-related hardware, including application-specific integrated circuits (ASICs), networking, and switching chips. He also expects the integration of VMWare will begin to make a meaningful contribution.
He’s not alone in his bullish take on Broadcom. Of the 38 analysts who offered an opinion on the stock in July, 33 rated the stock a buy or strong buy, and none recommended selling.
Nvidia: Implied upside 99%
The second stock-split stock with a boatload of potential is Nvidia (NASDAQ: NVDA). The company is the leading supplier of graphics processing units (GPUs) used in video games, cloud computing, and data center operations. This helped Nvidia quickly dominate the market for the chips used for generative AI, which supercharged its sales, as these GPUs provide the computational horsepower needed for AI.
For its fiscal 2025 first quarter (ended April 28), Nvidia generated record revenue of $26 billion, up a whopping 262% year over year, resulting in diluted EPS of $5.98, which surged 629%. The results were driven by the data center segment — which includes AI processors — as revenue for the segment soared 427% to $22.6 billion.
Nvidia’s blockbuster results have propelled its stock price up 600% since the start of 2023, leading to its high-profile 10-for-1 stock split in June. However, some on Wall Street believe there’s much more to come. Mosesmann has a buy rating on Nvidia and a Street-high price target of $200, which represents a potential upside of 99% compared to Wednesday’s closing price.
The analyst believes that many of his colleagues fail to grasp the importance of the software integrated with Nvidia’s AI processors, giving it a serious competitive edge. “We anticipate this software aspect will significantly increase in the next decade in terms of overall sales mix, with an upward bias to valuation due to sustainability,” Mosesmann wrote in a note to clients.
He isn’t the only one who believes there’s much more to come. Of the 58 analysts who covered the stock in June, 53 rated the stock a buy or strong buy, and none recommended selling.
Super Micro Computer: Implied upside 204%
The last of our trio of stock split stocks with plenty of room to run is Super Micro Computer (NASDAQ: SMCI), also known as Supermicro. The company has been supplying custom servers to the tech industry for more than 30 years. Supermicro’s building-block approach to rack-scale servers with direct liquid cooling technology is a perfect fit for the rigors of AI processing, as is the company’s legendary focus on energy efficiency.
Supermicro has established strong working relationships with all the biggest chipmakers, ensuring it can get its hands on the most in-demand processors, including those from Nvidia, Advanced Micro Devices, and Intel.
In its fiscal 2024 fourth quarter (ended June 30), Supermicro generated record revenue of $5.3 billion, up 143% year over year and 38% quarter over quarter. This resulted in adjusted earnings per share (EPS) of $6.25, up 78%.
While some investors were concerned about the company’s declining profit margin, CEO Charles Liang cited a bottleneck involving some server components, which pushed some deals into the next quarter. This, in turn, altered the product mix to include more lower-margin sales. He expects a rebound in the coming quarters.
Supermicro’s robust results since early last year have driven stock price gains of 516%, leading the company to announce a 10-for-1 stock split just this week. Some on Wall Street believe this is just the beginning. Loop Capital analyst Ananda Baruah has a buy rating on the shares and a Street-high price target of $1,500. That represents a potential upside of 204% compared to Wednesday’s closing price.
The analyst believes investors continue to underestimate Supermicro’s sales potential, suggesting it can deliver a revenue run rate of $40 billion during fiscal 2026, up from less than $15 billion to close out fiscal 2024. Management is forecasting a similar performance, guiding for net sales of roughly $28 billion at the midpoint of its guidance for fiscal 2025.
Wall Street seems to agree. Of the 17 analysts who offered an opinion in July, 12 rated the stock a buy or strong buy, and none recommended selling.
A note on valuation
Each of these stock-split stocks has a long runway ahead, yet despite their prospects, remain attractively priced. Nvidia, Broadcom, and Supermicro are currently trading for 36 times, 29 times, and 14 times forward earnings, compared to a price-to-earnings (P/E) ratio of 27 for the S&P 500. While two of the three fetch a slight premium compared to the broader market, their track record of business and performance, blistering stock price gains, and solid future potential make them worth every penny.
Should you invest $1,000 in Broadcom right now?
Before you buy stock in Broadcom, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Broadcom wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $641,864!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 6, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Nvidia and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, and Nvidia. The Motley Fool recommends Broadcom and 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 Stock-Split Stocks to Buy Hand Over Fist Before They Soar as Much as 204% According to Select Wall Street Analysts was originally published by The Motley Fool
Source: finance.yahoo.com