One of the more intriguing developments in the investing landscape over the past several years is the return to popularity of stock splits. The introduction of low-cost and no-cost trading made it easier for retail investors to get in on the action, helping fuel the resurgence.
Another factor driving the comeback is surging stock prices among a few of Wall Street's more elite companies. After years of strong business results, their shares can often sell for hundreds of dollars -- or even thousands -- putting them out of reach for all but the most affluent investors.
As a result, stock splits are back in the spotlight. Over the past few years, a growing list of investor-favorite companies have split their shares:
- Nvidia (NVDA 3.17%), a 4-for-1 split payable July 20, 2021.
- Amazon, a 20-for-1 split June 3, 2022.
- DexCom, a 4-for-1 split June 10, 2022.
- Shopify, a 10-for-1 split June 28, 2022.
- Alphabet, a 20-for-1 split July 15, 2022.
- Tesla, a 3-for-1 split Aug. 24, 2022.
- Palo Alto Networks, a 3-for-1 split Sept. 13, 2022.
- Monster Beverage, a 2-for-1 split March 27, 2023.
In the wake of last year's downturn, investors might be tempted to think there's simply no need for stock splits, especially since it doesn't change the underlying value of the company. They might be surprised to learn, then, that there are stocks that have gained sufficient ground to potentially justify a lower share price. Let's look at two likely candidates.
Image source: Getty Images.
1. Microsoft
Microsoft (MSFT 1.92%) is the creator of Windows, one of the most widely used operating systems in the world. And its Office suite of productivity tools is a staple on most workplace computers and many personal systems as well.
Over the years, the company has added to its credentials, becoming one of the big three among cloud infrastructure providers, and a leader in software-as-a-service (SaaS) apps for businesses, among many others.
But its recent moves in the field of artificial intelligence (AI) offer the greatest growth potential. After making a $13 billion bet on ChatGPT parent OpenAI -- and seeing the vast potential -- Microsoft quickly integrated its recently launched Copilot AI-based productivity tools into many of its most popular products, and expanded the list of AI tools available to Azure cloud users. This makes the company a strong front-runner in the AI revolution.
Those prescient moves are beginning to manifest themselves in the company's results. For its fiscal 2024 first quarter (ended Sept. 30), Microsoft's revenue growth accelerated to 13% year over year, while earnings per share (EPS) of $2.99 climbed 27%. This was fueled by Azure Cloud, which jumped 29%.
To put that growth into context, rivals Amazon Web Services (AWS) and Google Cloud grew cloud revenue by 12% and 22%, respectively, which shows that Azure stole market share. The company said that roughly 3 percentage points of Azure's growth were the result of growing demand for AI services, which has only just begun.
NASDAQ: MSFT
Key Data Points
Microsoft has a long track record of reliable growth, but the potential of AI has driven the stock up 54% so far in 2023. The results of the past decade are even more compelling: Revenue has grown 130%, driving net income up 240%. This has fueled stock price gains of 877%, with shares at $370 as of Friday's market close.
The company hasn't split its shares since 2003, but strong and accelerating price gains in recent years could be just the incentive needed to kick off its next split, which could happen over the coming year or so.
2. Nvidia
Nvidia's claim to fame was the invention of the modern graphics processing units (GPUs) that render lifelike images in video games. From those humble beginnings, the company has pivoted to adapt this technology to whisk data around the ether for cloud computing and to generate the computational horsepower required for AI systems. The accelerating development of uses for generative AI has caused a run on Nvidia's chips, fueling a surge in its stock price.
This isn't particularly surprising, given that Nvidia controls roughly 95% of the market for processors used in machine learning, according to data compiled by New Market Research. This suggests the company could control an equally dominant share of the generative AI chip market and reap the accompanying financial windfall.
NASDAQ: NVDA
Key Data Points
That fact was evident in Nvidia's fiscal 2024 second quarter (ended July 30), when it delivered record revenue of $13.5 billion, which surged 101%, while its diluted EPS of $2.48 soared 854%. Management is also forecasting triple-digit growth in the current quarter, making it clear that the catalyst was the accelerating demand for AI.
The company has an indisputable track record of steady growth, but AI has kicked that into the stratosphere, driving the stock up 237% so far this year. The trend is even more dramatic over the past 10 years, as revenue has grown more than 1,000%, driving net income up over 4,000%. This has fueled a surge in the share price, which is up more than 12,460%, topping out at about $493 as of Friday's market close.
Nvidia's most recent stock split occurred just two years ago, but in light of recent circumstances, it wouldn't be at all surprising if there is another one over the coming year.
Data by YCharts.
The cost of admission
While these stocks have spanked the performance of broader market indexes over the past decade, this has resulted in a commensurate increase in their valuations. Microsoft and Nvidia are selling for 9 times and 15 times next year's sales, respectively, which would be enough to send most value investors running for cover.
That said, given their performance over the past decade, each deserves a healthy premium. For those with a long-term outlook and the stomach for the inevitable volatility, I believe both Microsoft and Nvidia are still solid buys.
