Companies that issue stock splits have become quite popular with investors over the last year. But it’s important to understand what a stock split achieves and why companies issue them.
The most common type of split is a forward stock split, where a company increases its total share count while reducing the share price. The aim is to make each share more affordable for investors, but it’s not free money. You own more shares, but the value of your investment remains the same due to the lower share price.
Still, companies that split their shares are usually the high-growth variety, which is why it can often be rewarding to seek them out. It’s not surprising that a few of the stocks that have split their shares this year are involved in high-growth markets like software, cryptocurrency, and semiconductor solutions. The following two stocks are currently trading off their highs but could be poised for more gains.
1. MicroStrategy
MicroStrategy (NASDAQ: MSTR) is a provider of AI-powered enterprise analytics software, but investors can consider it a cryptocurrency stock nowadays. The reason is that management adopted a strategy in 2021 that involves using the cash from its software business to essentially dollar-cost average into Bitcoin.
The price of Bitcoin has doubled over the last 12 months, which also sent shares of MicroStrategy soaring to new highs. The company recently announced a 10-for-1 forward stock split on July 11, which it completed on Aug. 1, 2024. The stock recently pulled back off its highs, which could be a good buying opportunity, especially if you believe in the future of Bitcoin as a viable store of value.
The combo of limited supply and growing demand continues to drive the value of Bitcoin. After tumbling with the broader market in 2022, the price of a single Bitcoin rocketed to a new high of $73,750 this year. This came after the Securities and Exchange Commission approved several spot Bitcoin exchange-traded products, which should ultimately lead to more demand as the digital currency becomes more accessible to investors. One Wall Street firm sees the value of Bitcoin soaring to over $100,000 in 2025.
Further upside to Bitcoin would be a windfall for MicroStrategy. The company acquired 11,931 Bitcoins in the second quarter, bringing its total holdings to 226,500. The market value of that investment was $14.7 billion as of July 31, 2024, which is more than half the company’s current $27 billion market cap.
MicroStrategy stock has basically become a proxy for Bitcoin, but with the advantage that an investor holds shares in a business that also generates revenue from selling a product. The company’s total revenue was down 7% year over year in the most recent quarter, but it’s transitioning the software business to a cloud-based model that should improve its top-line momentum. Subscription revenue was up 21% over the year-ago quarter.
The risk is that MicroStrategy could get too aggressive with its Bitcoin strategy. It has $3.8 billion of debt, which it used to finance Bitcoin purchases, and most of that debt was issued in the first half of 2024 — a period known for inflation-boosted interest rates. If MicroStrategy’s debt continues to increase relative to its Bitcoin holding, investors should avoid the stock.
Overall, MicroStrategy offers a compelling way to invest in Bitcoin and benefit from any long-term upside in its software business. The stock has moved in tandem with the price of Bitcoin over the last three years, which validates MicroStrategy’s stock as a viable alternative to buying the digital currency directly.
2. Broadcom
Broadcom (NASDAQ: AVGO) shares are up 86% over the last year, driven by growing demand for its market-leading semiconductor and infrastructure software solutions. The company recently issued a 10-for-1 stock split on July 15.
Broadcom has supplied 5G radio frequency components for Apple products, as well as other electronics devices, but the company is gaining investor interest for its opportunity in data centers and AI infrastructure. The company’s total revenue grew 43% year over year in the second quarter, with operating profit also up 32% following the acquisition of cloud software provider VMware.
Broadcom is positioned to be a major beneficiary of the AI boom. Demand for AI-related infrastructure drove a 280% year-over-year increase in AI product revenue last quarter, which more than offset weak demand in other semiconductor products. Broadcom’s strategy to target markets that require high performance and mission-critical functionality is paying off.
The company started investing in AI a decade ago, but not necessarily for growth. Management invests in new markets that it believes will be around for at least 10 years and drive profitable growth for shareholders, and that’s why investors should consider it a solid investment. Broadcom is chasing AI’s long-term market growth, not a quick boost from the current AI-mania.
This approach has built Broadcom into a highly profitable business. It has increasingly focused on acquiring software companies in the last decade, which has boosted its cash flow. The company produced $18 billion in free cash flow on $42 billion of revenue over the last year.
Analysts expect the company’s earnings per share to grow at an annualized rate of 18%. At these growth rates, investors could potentially double their investment in five years, which makes the stock a great buy after dipping from its recent high of $185.
Should you invest $1,000 in MicroStrategy right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Bitcoin. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
2 Stock-Split Stocks to Buy on the Dip was originally published by The Motley Fool
Source: finance.yahoo.com