There's an age-old debate on Wall Street regarding the value of stock splits. In one camp are those who believe this process is unnecessary, as it doesn't change the underlying value of the company. The other camp believes keeping shares within reach of everyday investors plays an important role in investor psychology.
More important, however, is the fact that most stock splits are typically preceded by a period of robust business performance that sends the stock price soaring. Let's look at two companies with a history of stock splits -- fueled by strong financial results -- that could be poised for even greater gains due to recent advances in artificial intelligence (AI).
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1. Alphabet
Since its IPO -- as Google -- in 1998, Alphabet (GOOGL 1.08%) (GOOG 1.06%) stock has had a long and distinguished run. The company's revenue has increased by more than 11,000%, while its earnings per share (EPS) have soared 31,000%, resulting in 5,360% stock price gains.
To keep its stock price reasonable for retail investors, the company has split its shares twice, the most recent being a 20-for-1 stock split in mid-2022. While Alphabet stock likely won't match the scorching gains of the past 25 years, the company's AI expertise could provide a strong catalyst in years to come.
While a slump in online advertising last year posed challenges, Alphabet hasn't wasted any time diving into the AI revolution. Earlier this year, Alphabet debuted its next-generation chatbot Bard, a direct rival to ChatGPT. The company continues to forge ahead, integrating AI across a broad cross-section of its products and services, which will fuel its next phase of growth.
Much of Alphabet's main focus has been on enhancing its existing Google products -- which boast billions of users -- and supercharging its cloud infrastructure service with AI functionality. Google Cloud is the fastest-growing of the "big three," up 31% year over year in the second quarter, outpacing Amazon and Microsoft, which delivered 12% and 26%, respectively. This gives the company a large and growing target market for its AI services. Google is also infusing AI into its namesake search, with plans to debut new AI-powered features in the coming weeks and months.
This infusion of AI functionality should help Google maintain its search dominance and will also be an easy sell to many of the company's cloud computing customers, helping it continue to steal share from its cloud rivals.
Alphabet's digital advertising is still recovering from last year's downturn, and AI hasn't made much of an impact on its cloud results thus far. In the second quarter, cloud revenue rose just 28% year over year to $8 billion, but as demand for AI continues to accelerate, Google Cloud should reap the rewards of Alphabet's continuing AI investments.
2. Nvidia
Nvidia (NVDA -1.99%) has a long history of performance and stock splits, with the most recent a 4-for-1 stock split coming in late 2021. This was preceded by an even longer history of performance, resulting in revenue that increased by nearly 19,000% and EPS that grew 66,000%, driving its stock price up 56,000% since its 1999 IPO. While investors shouldn't expect the same blistering gains over the next 24 years, AI and cloud computing could act as significant catalysts for Nvidia over the coming decade or more.
The company pioneered the graphics processing units (GPUs) that render lifelike images in video games, but they also helped kick-start the AI revolution. The parallel processing capability of the chips -- or the ability to run a multitude of complex mathematical computations simultaneously -- proved perfect for the massive number-crunching needs of AI.
Nvidia quickly pivoted to capitalize on that need, developing software-infused chips and systems to provide turnkey solutions for AI. Nvidia GPUs are already the gold standard for cloud computing and data center operations, proving equally adept at speeding data through the ether, and are the choice of all the largest cloud infrastructure providers, including Amazon Web Services (AWS), Microsoft Azure, and, of course, Google Cloud.
Nvidia's data center segment, which includes processors used for AI, has been on fire so far this year. For its fiscal 2024 second quarter (ended July 30), data center revenue soared 141% year over year to a record $10 billion, and management believes another consecutive record-setting quarter is on tap thanks to AI.
The fine print
One of the side effects of a soaring stock price is an equally high valuation -- and neither of these stocks can honestly be called cheap. Alphabet is currently selling for 24 times forward earnings, in line with the price-to-earnings ratio of 24 for the S&P 500. At the same time, Nvidia trades for 40 times earnings. While that might seem outrageous at first glance, I've argued before that Nvidia's growth potential justifies a hefty price tag. The once-in-a-generation shift to AI provides an unprecedented opportunity that shouldn't be missed. While no one knows for sure how large the market is, most on Wall Street believe the opportunity is worth trillions of dollars, and Nvidia is well positioned to capture its share of that windfall.
For those looking for a degree of safety, Alphabet has that in spades. That said, Nvidia has the most to gain from the accelerating adoption of AI.
