The past two years have featured no shortage of ups and downs for the investing community. The major U.S. stock indexes climbed to all-time highs in 2021, were clobbered by the 2022 bear market, and have rebounded strongly through the first six months and change of 2023.
Throughout these wild vacillations on Wall Street, investors have consistently gravitated to companies that have enacted stock splits.
A stock split is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count without having any impact on its market cap or operations. Stock splits can make shares more nominally affordable for everyday investors, as with a forward stock split, or can be used to increase a company's share price to maintain minimum listing standards on a major stock exchange as is often the case with reverse stock splits.
Image source: Getty Images.
Although reverse stock splits do garner attention from time to time, most investors are laser-focused on forward stock splits. Companies conducting forward splits are usually out-innovating and out-executing their competition. In other words, they're top-tier businesses.
Since the start of July 2021, eight high-profile stocks have enacted forward splits, including:
- Nvidia (NVDA 6.18%): 4-for-1 split in July 2021.
- Amazon (AMZN 3.43%): 20-for-1 split in June 2022.
- DexCom (DXCM -9.90%): 4-for-1 split in June 2022.
- Shopify (SHOP 1.11%): 10-for-1 split in June 2022.
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split in July 2022.
- Tesla (TSLA -1.11%): 3-for-1 split in August 2022.
- Palo Alto Networks (PANW 0.91%): 3-for-1 split in September 2022.
- Monster Beverage (MNST 0.41%): 2-for-1 split in March 2023.
Although these stock-split stocks have, recently, vastly outperformed, not all Wall Street analysts are on board with the idea that additional upside awaits. What follows are three stock-split stocks that select analysts and Wall Street institutions believe could decline between 18% and 91%.
Amazon: Implied downside of 18%
The first ultra-popular stock-split stock that may not live up to its billing, at least according to one Wall Street analyst, is e-commerce leader Amazon. Analyst Barton Crockett of Rosenblatt has a neutral rating on shares of the company with a price target of "only" $111. This would imply 18% downside to come in shares of Amazon, based on where it closed on July 14.
What's arguably the biggest issue for Amazon is the expectation from investors that retail sales will slow as the Federal Reserve pushes interest rates higher. Amazon generates a sizable percentage of its sales from its flagship online marketplace.
However -- and this is a pretty big "however" -- Amazon's leading revenue segment isn't as important to its cash-flow generation and profitability as you might think. Despite bringing in a boatload of revenue for the company and attracting people to its website, the online marketplace is a low-margin segment. Amazon's ancillary businesses are of far greater importance, and they're continuing to fire on all cylinders.
Amazon Web Services (AWS) is the world's leading cloud infrastructure services provider, with 32% of global cloud service spending share, based on estimates from Canalys, as of the end of March. Enterprise cloud spending is still in its early stages, and the operating margin associated with cloud services is considerably higher than with online retail sales.
Other critical segments for Amazon include subscription services and advertising services. As of April 2021, the company had surpassed 200 million Prime subscribers and was one of the most-visited websites on the planet. Selling Prime subscriptions and maintaining strong ad-pricing power also provide Amazon with superior margins relative to online retail sales.
Though Amazon may not be as much of a screaming deal as it was during the 2022 bear market, the cash-flow multiple it's trading at, relative to Wall Street's forward-year consensus, is historically cheap.
Nvidia: Implied downside of 19%
A second high-profile stock-split stock that one Wall Street analyst believes may have meaningful downside to come is semiconductor solutions provider Nvidia. Analyst Ruben Roy at Stifel upped his firm's price target on Nvidia to $370 per share in May, which as of the closing bell on July 14 would imply a 19% decline in the company's shares.
The clearest headwind for Nvidia is going to be its valuation. Shares have more than tripled on a year-to-date basis, with the company's artificial intelligence (AI) ties driving its outperformance. Whereas Nvidia has averaged an already expensive price-to-cash-flow ratio of nearly 57 over the past five years, it's now trading at closer to 166 times cash flow. From a fundamental perspective, it's almost impossible to justify the current valuation.
Another problem for Nvidia is that next-big-thing investments have a propensity to form bubbles in their early stages and pop. Dating back 30 years, the internet, business-to-business commerce, genome decoding, 3D printing, blockchain technology, and the metaverse are just some examples of next-big-thing innovations that needed time to mature. AI likely won't be the exception.
Nvidia might also face tighter export restrictions to China for its AI-driven graphics processing units (GPUs). Despite developing a slower chip for its Chinese customers, U.S. regulators are looking at further limiting Nvidia's ability to export its AI GPUs to China.
The one factor Nvidia does have working in its favor is its overwhelming market share in data centers. Forecasts suggest Nvidia may account for 90% of AI-focused GPUs in enterprise data centers. Unfortunately, even this may not be enough to support a valuation in excess of $1 trillion.
The price of Tesla's flagship sedan, the Model 3, has been reduced multiple times this year. Image source: Tesla.
Tesla: Implied downside of 91%
The third high-profile stock-split stock that at least one Wall Street analyst foresees losing a significant percentage of its value is electric vehicle (EV) manufacturer Tesla. The founder and CEO of GLJ Research, Gordon Johnson, has just slapped a $24.33 price target on shares of the company after adjusting for last year's stock split. That's 91% below where Tesla shares closed on July 14.
Although Tesla is the only pure-play EV company that's generating a recurring profit, and it's the first automaker to have successfully built itself from the ground up to mass production in more than 50 years, there are well-defined red flags that rightly have Wall Street analysts like Johnson cautious about the company's future.
Perhaps the most front-and-center concern for Tesla is the price war it precipitated among EV producers. Tesla has reduced prices for key models in the U.S. on a half-dozen occasions since the year began. While there had been hope that these price cuts were nothing more than a ploy for Tesla to grab additional share from competitors, CEO Elon Musk noted during a question-and-answer session at the company's annual shareholder meeting that Tesla's pricing strategy is being driven by demand. If prices are declining, it's because inventory levels are rising and competition is picking up.
As I've pointed out previously, Elon Musk is also a risk for existing shareholders. Musk may be innovative, but he has a knack for drawing unwanted attention from securities regulators. Far more worrying, Musk has made promises about full self-driving vehicles, innovations, and product launches that haven't been met. As these promises build and go unfulfilled, it becomes likelier that Tesla's share price could deflate.
Similar to Nvidia, Tesla's valuation is problematic as well. Whereas traditional auto stocks trade at single-digit price-to-earnings (P/E) multiples, Tesla is commanding a P/E ratio of around 80. That's an issue for a company with a declining automotive gross margin that's struggled to become more than a just a car company.
While there's no denying that Tesla generates investor buzz as well as any publicly traded company, sustaining its existing valuation, let alone pushing higher, will be increasingly difficult.
