When the going gets tough on Wall Street, investors have a tendency to turn their attention to time-tested businesses with a history of outperformance. For the past decade, the FAANG stocks have fit this definition perfectly. But over the past two years, it's companies enacting stock splits that have been exceptionally popular during periods of market instability.
A stock split is an event that allows a publicly traded company to alter both its share price and outstanding share count while having no impact on its market cap or operating performance. Think of a stock split as a purely cosmetic change to a company's share price that can make it more nominally affordable for everyday investors or can ensure that a company meets the minimum listing standards for major stock exchanges.
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Most investors tend to gravitate to companies enacting forward-stock splits -- those reducing their share price to make it more nominally affordable for retail investors. Companies conducting forward-stock splits are usually highfliers that are outperforming and outinnovating their competition.
Since the start of July 2021, nine high-profile companies have conducted forward-stock splits, including:
- Nvidia (NVDA 6.18%): 4-for-1 split conducted in July 2021.
- Amazon (AMZN 3.43%): 20-for-1 split conducted in June 2022.
- DexCom (DXCM -9.90%): 4-for-1 split conducted in June 2022.
- Shopify (SHOP 1.11%): 10-for-1 split conducted in June 2022.
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split conducted in July 2022.
- Tesla (TSLA -1.11%): 3-for-1 split conducted in August 2022.
- Palo Alto Networks (PANW 0.91%): 3-for-1 split conducted in September 2022.
- Monster Beverage (MNST 0.41%): 2-for-1 split conducted in March 2023.
- Novo Nordisk (NVO 0.84%): 2-for-1 split conducted in September 2023.
Among these nine stock-split stocks, a select group of Wall Street analysts and pundits have identified three they believe could rise by as much as 696%. Based on Wall Street's high-water price targets, the following three stock-split stocks offer the greatest upside.
Tesla: Implied upside of 696%
The stock-split stock with the most to gain, at least according to Ark Invest CEO and Chief Investment Officer Cathie Wood, is electric vehicle (EV) manufacturer Tesla. An Ark Invest report released in April calls for North America's leading EV producer to reach $2,000 per share by 2027. This would mark nearly 700% upside compared to where Tesla shares closed out this past week.
Cathie Wood and Ark's researchers have made a number of assumptions to justify their $2,000 price target. Namely, they expect Tesla to generate between $200 billion (bear case) and $613 billion (bull case) in annual autonomous ride-hail revenue by 2027. Furthermore, the number of EVs Tesla sells each year is expected to catapult from a little north of 1.3 million in 2022 to between 10.3 million (bear case) and 20.7 million (bull case) come 2027.
Although Tesla is the only pure-play EV producer that's currently profitable on the basis of generally accepted accounting principles (GAAP), and it's the first automaker in well over a half-century to build itself from the ground up to mass production, I'd label Wood's price target on Tesla as "Wall Street's most ridiculous."
The main issue with Wood's analysis is that her and her teams' assumptions appear flawed. For instance, Tesla's four existing gigafactories likely have a maximum production capacity of a little north of 2 million units annually. For Tesla to reach at least 10.3 million EVs sold by 2027, it'd likely have to open three to four new gigafactories per year and be able to ramp up these production facilities with no issues. This scenario seems unrealistic.
To build on the above, Wood's call for $200 billion to $613 billion in autonomous ride-hailing revenue within four years is borderline laughable. Tesla hasn't been able to advance beyond Level 2 autonomy for years, which means the company isn't anywhere close to having autonomous ride-hailing EVs on public roads.
Worst of all, Tesla kick-started a price war with other EV manufacturers earlier this year. As a result of growing competition and rising inventory, Tesla's operating margin has been nearly halved in a nine-month stretch.
Suffice it to say, I don't see Tesla getting anywhere near $2,000 per share by 2027.
DexCom: Implied upside of 110%
A second stock-split stock that could more than double, based on the high-water price target of one Wall Street analyst, is medical-device maker DexCom. According to senior research analyst Matt O'Brien at Piper Sandler, DexCom shares can reach $160, which would represent upside of 110% from where the company's stock ended this past week.
Shares of DexCom have been absolutely clobbered since mid-July, with the primary downside catalyst being Novo Nordisk's drugs, Ozempic and Wegovy. Although the former is approved by the U.S. Food and Drug Administration (FDA) to treat type 2 diabetes, both Ozempic and Wegovy are glucagon-like peptide-1 (GLP-1) drugs that have helped users lose weight.
DexCom is the one of the two largest players in continuous glucose-monitoring systems (CGMs). For the 37.3 million people in the U.S. with diabetes, weight management tends to be a common issue. The connect-the-dots thesis that explains DexCom's recent decline is that Novo Nordisk's game-changing therapies that induce weight loss could eventually lead to fewer cases of type 2 diabetes and therefore less of a need for CGMs.
Admittedly, this train of thought is a bit of a stretch. Ozempic isn't approved by the FDA for weight loss, and there's nothing concrete to suggest that Novo Nordisk's GLP-1 drugs will make a dent in what's been a steady increase in diabetes cases in the United States. Based on data collected between 2017 and 2020, just shy of 42% of adults in the U.S. were obese. Given the higher instances of co-morbidities associated with people who are overweight, CGM companies like DexCom should continue to see plenty of demand for their products.
But what's really allowed DexCom to shine is its innovation. While it has, clearly, benefited from a growing number of diabetes cases in the U.S. and globally, it's the evolution of DexCom's CGMs that sets it apart. The company's latest CGM, the DexCom G7, sends real-time blood glucose readings to a person's smartphone or watch, which is one of many ways it's differentiating itself from the competition.
Although DexCom's forward price-to-earnings (P/E) ratio of 47 remains pricey, the company should have no trouble sustaining a double-digit growth rate.
Image source: Getty Images.
Nvidia: Implied upside of 142%
The third stock-split stock with mouthwatering upside, based on the high-water price target of one Wall Street analyst, is semiconductor-solutions specialist Nvidia. Analyst Hans Mosesmann of Rosenblatt Securities has a $1,100 price target on Nvidia, which equates to upside of 142% relative to where shares closed out this past week.
The fuel behind Mosesmann's seemingly otherworldly price target that would take Nvidia well north of a $2.5 trillion market cap is the artificial intelligence (AI) revolution. AI involves using software and systems, along with machine learning, to handle tasks that would normally be overseen by humans.
What makes Nvidia special is that it's the infrastructure backbone of the AI movement. The company's A100 and H100 graphics processing units (GPUs) account for 90% (or more) of the GPUs currently being used in high-compute data centers. With chip-fab capacity maxed out for Nvidia's AI-accelerated GPUs, Nvidia has been able to command exceptional pricing power. As a result, the company's sales and profit forecasts have completely blown past even the loftiest projections by Wall Street.
While there have been clear catalysts pushing Nvidia higher, the company could face an assortment of headwinds in the coming quarters. For example, production expansion will likely be a net negative for Nvidia. With chip-fabrication company Taiwan Semiconductor Manufacturing set to potentially double its chip on wafer on substrate capacity (CoWoS) by the end of 2024, there should be less scarcity of Nvidia's A100 and H100 GPUs. Less scarcity probably means less pricing power and weaker future margins.
Furthermore, Nvidia will be facing increased competition. Advanced Micro Devices debuted its MI300X AI-accelerated GPU in June, with plans to really ramp up production in 2024. Meanwhile, Intel will be bringing its Falcon Shores GPU to market in 2025.
Another issue for Nvidia is that every next-big-thing trend over the past 30 years has endured an initial bubble. While AI has the opportunity to be a long-term game changer, it's not yet clear if demand for AI products and solutions can meet or exceed the lofty expectations investors currently have for the technology.
As I wrote earlier about Wood's price target with Tesla, I don't believe Mosesmann's price target on Nvidia has a chance of being met.
