Wall Street seemingly has two loves at the moment: anything that has to do with artificial intelligence (AI) and companies conducting stock splits. What you might not realize is that these two trends are intersecting for a trio of companies.
A stock split is a tool publicly traded companies have at their disposal that allows them to alter their share price and outstanding share count. Keep in mind that these changes are purely superficial, with stock splits not affecting a company’s market cap or its underlying operating performance.
Though stock splits come in two varieties — forward (reducing the nominal share price) and reverse (increasing the nominal share price) — most investors tend to flock to companies completing forward-stock splits. Since high-flying businesses are out-innovating and out-executing their competition, forward splits are almost always being conducted from a position of operating strength. This can rarely be said for publicly traded companies enacting reverse-stock splits.
Over the trailing-six-month period, 13 prominent businesses have announced or completed a stock split, all but one of which was of the forward-split variety. Three of these completed or anticipated stock-split stocks are companies leading the charge for the artificial intelligence revolution.
Nvidia, Broadcom, and Super Micro Computer have all declared historic stock splits
The excitement surrounding the rise of AI is palpable. According to the analysts at PwC, AI is forecast to add $15.7 trillion to the global economy by the turn of the decade. This enormous addressable market suggests there can be multiple big-time winners thanks to this leap forward in technology.
On May 22, hardware leader Nvidia (NASDAQ: NVDA) kicked things off by declaring a 10-for-1 forward split — the largest forward split in its history. Shortly after its split was effected following the close of trading on June 7, Nvidia’s stock would touch a market cap of $3.46 trillion, which briefly made it the most-valuable publicly traded company on Earth.
Nvidia’s H100 graphics processing unit (GPU) has become the standard in high-compute enterprise data centers looking to train large language models (LLMs) and run generative AI solutions. A veritable market share monopoly on the “brains” behind AI-accelerated data centers, coupled with exceptionally strong pricing power due to AI-GPU scarcity, has powered Nvidia’s stock higher.
AI networking specialist Broadcom (NASDAQ: AVGO) was next in line to join the “Class of 2024” stock-split club. The company’s board approved a 10-for-1 split (its first-ever) on June 12, with an effective date following the close of business on July 12.
Broadcom’s networking solutions (e.g., the Jericho3-AI fabric) have gained notoriety for connecting large numbers of AI-GPUs in enterprise data centers in order to reduce tail latency and ensure that businesses are getting as much compute capacity as possible out of these chips. In other words, Broadcom is helping to further expedite the split-second decision-making that’s needed of AI-driven software and systems.
Lastly, customizable rack server and storage specialist Super Micro Computer (NASDAQ: SMCI) joined the club by announcing its first-ever stock split on Aug. 6, also 10-for-1, which’ll go into effect after the close of trading on September 30.
Super Micro’s server solutions have been in high demand as businesses build out the physical infrastructure necessary to train LLMs, runs generative AI solutions, accelerate quantum computing, and so much more. Super Micro more than doubled its sales in fiscal 2024 (ended June 30) to $14.94 billion, and is widely expected by analysts to generate sales growth of 75% to north of $26 billion in the current fiscal year.
Two of these three AI stock-split stocks aren’t worth buying
But in spite of the euphoria surrounding stock-split stocks, not all leading businesses involved with the AI revolution are worth buying.
The harsh reality of next-big-thing innovations is that they have a history of disappointment. Over the last three decades, every buzzy innovation, technology, or trend that lured investors in with big dollar signs succumbed to an eventual early stage bubble.
The reason bubbles continually form on Wall Street when new technologies or trends arrive is because investors (both professional and retail) have a habit of overestimating how quickly new innovations will be adopted and utilized. Investors are consistently overoptimistic and fail to take into account that innovations, technologies, and trends all need time to mature.
One of the telltale signs that artificial intelligence isn’t close to being a mature technology is the lack of concrete plans offered by tech companies as to how they’ll use AI to grow their sales and increase their profits. While select companies may have some broad stroke expectations in place, the vast majority of businesses lack a true AI game plan. This all but ensures the AI bubble is going to burst at some point in the future.
If history is accurate and the AI bubble does burst, no company would be hit harder than Nvidia. The bulk of its valuation gains and recent sales growth have come on the heels of its AI hardware and AI-GPU scarcity. Once this scarcity wanes, which should be expected as external and internal competition for data center “real estate” picks up, Nvidia’s stock could have a long way to fall.
Super Micro Computer is in a similar predicament. Almost the entirety of its recent sales leap has been based on businesses building out their data centers. If the AI bubble bursts, or if businesses come to the realization that they don’t understand how generate a positive return on their AI investment, Super Micro’s future server orders, and its stock, are going to suffer.
To add, Super Micro’s rack servers incorporate Nvidia’s leading H100 GPUs, which are currently backlogged. The longer supply constraints exist, the more likely it is that Super Micro will fail to live up to its potential.
This is the only AI stock-split stock worth buying right now
Among Wall Street’s trio of AI stock-split stocks, Broadcom is the cream of the crop from an investment standpoint.
While it’s true that Broadcom has notably benefited from an increase in demand for its AI-driven networking solutions, it had an extensive and diverse revenue stream, complete with a mammoth backlog, prior to the emergence of artificial intelligence as the hottest thing on Wall Street.
For example, Broadcom is one of the leading providers of wireless chips, along with other accessories, used in next-generation smartphones. Telecom companies spending big bucks to upgrade their wireless networks to support 5G download speeds have spurred a multiyear device upgrade cycle that’s lifted demand for Broadcom’s wireless solutions.
Broadcom has its fingers in multiple cookie jars beyond smartphones, as well. It provides financial services software, cybersecurity solutions, and optical products used in next-gen vehicles and industrial equipment, to name just a few things.
Broadcom’s management team has also used acquisitions as a means to expand the company’s product and service ecosystem and grow its bottom line. This includes the acquisition of cybersecurity solutions provider Symantec in 2019, as well as the $69 billion deal to purchase VMware in November 2023. Buying VMware is particularly important to furthering Broadcom’s strategy of helping businesses overcome the challenges of customizing private, hybrid, and multi-cloud environments.
The key point here is that the potential bursting of the AI bubble doesn’t turn Broadcom’s world upside down in the same way that it would for Nvidia and Super Micro Computer. While Broadcom would, almost certainly, see AI networking sales slow or contract, many of its other sales channels would be unaffected.
At 24 times forward-year earnings, Broadcom is, admittedly, not the steal of a deal it was as recently as two years ago. But with its earnings per share expected to grow by an annualized rate of 18% over the next five years, its valuation offers room for multiple expansion.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Artificial Intelligence (AI) Stock-Split Stocks Are All the Rage on Wall Street — But Only 1 Is a Clear-Cut Buy Right Now was originally published by The Motley Fool
Source: finance.yahoo.com