Directional moves in the stock market have been no more predictable than a coin flip since this decade began. The COVID-19 pandemic and 2022 bear market sent investor sentiment into the doldrums, while historically low interest rates and a capital-injecting Fed fueled stock-buying in 2021.
When Wall Street vacillates, smart investors typically turn to outperforming stocks. Over the past two years, companies enacting stock splits certainly fit the bill.
A stock split is an event that allows a publicly traded company to alter both its share price and outstanding share count without having any impact on its market cap or operating performance. This purely cosmetic change can make shares more nominally affordable for everyday investors (via a forward-stock split) or increase a company's share price to avoid delisting from a major stock exchange (via a reverse-stock split).
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Most investors are intrigued by forward stock splits, since forward splits are undertaken by high-flying companies that are out-innovating and outperforming their competition. Since the beginning of July 2021, eight high-profile companies have conducted a forward split, including:
- Nvidia (NVDA 6.18%): 4-for-1 split effective July 2021
- Amazon (AMZN 3.43%): 20-for-1 split effective June 2022
- DexCom (DXCM -9.90%): 4-for-1 split effective June 2022
- Shopify (SHOP 1.11%): 10-for-1 split effective June 2022
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split effective July 2022
- Tesla (TSLA -1.11%): 3-for-1 split effective August 2022
- Palo Alto Networks (PANW 0.91%): 3-for-1 split effective September 2022
- Monster Beverage (MNST 0.41%): 2-for-1 split effective March 2023
While all eight of these companies have vastly outperformed their peers, their outlooks differ greatly. In September, one historically cheap stock-split stock has a multitude of catalysts working its favor, while another is priced for perfection in an industry that's far from perfect.
The stock-split stock to buy hand over fist in September: Alphabet
The no-brainer stock-split stock to buy in September is none other than Alphabet, the parent company of internet search engine Google, autonomous vehicle company Waymo, and streaming service YouTube, among other subsidiaries.
Like every publicly traded company, Alphabet does, indeed, have headwinds it's contending with. As an advertising-driven company, an expected weakening of U.S. growth in the months and quarters that lie ahead is, arguably, the biggest concern. Numerous predictive indicators and money-based metrics are forecasting some level of recession for the U.S. economy, which would almost certainly lead to advertisers paring back their spending.
However, this is a short-term worry for a company with many long-term ambitions and competitive advantages.
To start with, Alphabet has macroeconomic factors working in its favor over the long run. Even though recessions are an inevitable part of the economic cycle, they tend to be short-lived. None of the 12 recessions following World War II have lasted longer than 18 months. Meanwhile, most economic expansions have lasted multiple years. Ad-driven businesses like Alphabet are well-positioned to take advantage of these long periods of expansion.
Alphabet's dominance is 100% on display in the internet search space. Since April 2015, Google has accounted for no less than 90% of worldwide internet search share. Holding a nearly 90-percentage-point market share lead on its next-closest competitor means it can command exceptional pricing power from advertisers. There's no reason to believe Google won't remain a true cash cow for years to come.
But a lot of Alphabet's growth for the remainder of the decade could come from its ancillary operations. I'm primarily talking about YouTube and Google Cloud. The former is the world's No. 2 most-visited social platform, and has seen the number of daily views of short-form videos (known as Shorts) grow from 6.5 billion to north of 50 billion in two years. This should further enhance the company's ad-pricing power.
Google Cloud has become the world's No. 3 cloud infrastructure service provider (9% of global share, per Canalys), and the segment has recorded two consecutive quarters of operating profits after years of operating losses. Enterprise cloud spending is still in its early stages, which suggests Google Cloud can sustain a double-digit growth rate throughout the decade.
Lastly, Alphabet's valuation is historically cheap. Whereas the company has traded at an average multiple of more than 18 times cash flow over the past five years, investors can buy shares of the company right now for less than 15 times forward-year cash flow, and an estimated 10 times cash flow per share in 2027, based on Wall Street's consensus.
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The stock-split stock to avoid like the plague in September: Nvidia
Unfortunately, not all stock-split stocks are going to be winners. If there's one company that stands out for the wrong reasons among the eight listed above, it's semiconductor solutions specialist Nvidia.
To be completely fair, Nvidia has crushed it this year and proved naysayers like myself wrong at every turn. The company is being fueled by the rise of artificial intelligence (AI). AI describes the use of systems and software to handle tasks that would normally be undertaken by humans. Incorporating machine learning solutions is what allows these software and systems to learn/evolve over time and become more efficient at their tasks.
While Nvidia does have a handful of stand-alone AI solutions up its sleeve, it's primarily viewed as the infrastructure backbone of high-compute data centers. Nvidia's A100 and H100 graphics processing units (GPUs) are being used by businesses in AI-accelerated data centers to aid with ultra-fast-processing, which is a requirement of AI solutions. It's been estimated that Nvidia accounts for around 90% of high-compute GPUs in data centers.
Nevertheless, there are a couple of reasons for investors to be highly skeptical of Nvidia following a 238% year-to-date gain, as of the end of August.
Perhaps the most glaring flaw for Nvidia is that its cost of revenue has declined through the first six months of fiscal 2024 (Nvidia's fiscal year ends in late January). What this tells us is that the entirety of Nvidia's supercharged sales growth in data centers has come from pricing power and not volume. Although having strong pricing is, generally, good news, this level of pricing power isn't sustainable with competition mounting.
Later this year, Advanced Micro Devices will be rolling out its MI300X GPU to select customers, with the goal of ramping up production into 2024. Meanwhile, Intel is debuting its Falcon Shores GPU for high-compute data centers in 2025. Even the simple act of Nvidia increasing the output of A100 and H100 GPUs will clobber its pricing power and reduce scarcity.
Another potential problem for Nvidia is U.S. regulators curbing exports of its high-powered GPUs. Nvidia has already had exports of its A100 and H100 GPUs to China restricted, and officials announced last week that certain Middle East countries will be added to the list. Though the Middle East represents a very small percentage of sales for the company, China is a different story.
Additionally, history is not on Nvidia's side when it comes to the rise of next-big-thing innovations. Every next-big-thing investment over the past 30 years has gone through an initial bubble period, and AI will likely follow that trend.
The final reason to avoid Nvidia like the plague is its valuation. Whereas investors could have purchased shares of Nvidia for 11 to 17 times year-end cash flow between 2013 and 2015, they're now paying in excess of 100 times trailing-12-month cash flow. There are simply far too many headwinds for Nvidia to sustain its lofty valuation.
