For much of the past four years, volatility has been a fixture on Wall Street. All three major stock indexes have bounced between bull and bear markets on a couple of occasions.
When short-term uncertainty arises, investors have a tendency to seek out time-tested businesses with a track record of outperformance. Although the FAANG stocks have been popular with investors for the past decade, it's stocks enacting splits that have fit the bill for the past two years.
A stock split is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count while having no impact on its market cap or operating performance. A forward-stock split makes a company's share price more nominally affordable for everyday investors, while a reverse-stock split increases a public company's share price, likely to ensure it maintains minimum listing standards on a major stock exchange.
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Between the two, forward-stock splits tend to get the most attention -- and with good reason. Companies enacting forward splits are typically highfliers that have out-executed and out-innovated their competition. Since mid-2021, nine top-tier businesses have completed forward-stock splits (listed in chronological order by date of split):
- Nvidia (NVDA 6.18%): 4-for-1 split
- Amazon (AMZN 3.43%): 20-for-1 split
- DexCom (DXCM -9.90%): 4-for-1 split
- Shopify (SHOP 1.11%): 10-for-1 split
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split
- Tesla (TSLA -1.11%): 3-for-1 split
- Palo Alto Networks (PANW 0.91%): 3-for-1 split
- Monster Beverage (MNST 0.41%): 2-for-1 split
- Novo Nordisk (NVO 0.84%): 2-for-1 split
All nine of these companies are leaders within their respective industries. However, the outlooks for these highfliers in the years to come vary quite a bit. As we push into December and ready to close the curtain on 2023, one stock-split stock remains historically cheap despite a sizable year-to-date rally, while another top performer appears set to face a slew of headwinds in 2024 (and beyond).
The stock-split stock to buy hand over fist in December: Alphabet
Among the nine prominent stock-split stocks listed above, the one that stands out as the best value in December -- even with a 50% year-to-date gain -- is Alphabet. This is the parent company of internet search engine Google and streaming platform YouTube, among other ventures.
The primary reason shares of Alphabet tumbled more than 40% during the 2022 bear market was the growing fear that the U.S. would fall into a recession. Alphabet generated nearly 78% of its total revenue from advertising during the September-ended quarter, and advertisers usually pare back their spending at their first signs of economic weakness. Since ad revenue is so important to Alphabet's cash flow, the company's stock became a victim of "what if?" thinking.
But here's the important thing to know about recessions: Although we can never predict when they'll occur, history shows they're short-lived. Of the 12 U.S. recessions that have occurred following World War II, nine have lasted less than a year, and none have surpassed 18 months. That compares to a handful of expansions that lasted between four and 12 years over the same timeline. These lengthy periods of expansion provide Alphabet with plenty of ad-pricing power.
Something else Alphabet brings to the table is the utter dominance of its internet search engine. Based on data provided by GlobalStats, Google accounted for 91.55% of worldwide internet search share in October. It's held a monthly share of 90% or greater in global internet search for more than eight years. Merchants are well aware that Alphabet's search engine provides them the best chance to reach a broad audience with their message(s).
However, Google isn't Alphabet's only source of long-term ad growth. Streaming platform YouTube has over 2.7 billion monthly active users (MAUs), which places it behind only Meta Platforms' Facebook in total MAUs. In particular, the rapid growth of Shorts (short-form videos often lasting less than 60 seconds) from 6.5 billion daily views to north of 50 billion in two years has the potential to meaningfully lift the organic growth rate for YouTube and parent Alphabet.
An even stronger long-term growth driver than YouTube is cloud infrastructure service platform Google Cloud. According to tech-analysis company Canalys, Google Cloud commands 10% of worldwide cloud infrastructure service spending, which is a big deal considering that enterprise cloud spending is still in the very early innings. Following multiple years of losses, Google Cloud has delivered three consecutive quarters of profits. With cloud margins often outpacing advertising margins, Google Cloud may become Alphabet's leading cash-flow driver by the latter half of the decade.
And, as promised, Alphabet remains historically inexpensive. Over the trailing-five-year period, Alphabet has traded at an average of 18 times its year-end cash flow. Opportunistic investors can snag shares of this industry leader in December for less than 14 times forward-year cash flow. It's a low-water mark for a top-tier business.
Image source: Getty Images.
The stock-split stock to avoid like the plague in December: Nvidia
Although all nine of the highlighted stock-split stocks have vastly outperformed over the long run, the one that could struggle to deliver superior returns moving forward is semiconductor giant Nvidia.
When November came to a close, shares of Nvidia were 220% higher from where they began 2023. The fuel behind this phenomenal performance is the artificial intelligence (AI) revolution. Based on estimates from PwC, AI has the potential to boost worldwide gross domestic product by $15.7 trillion come 2030.
Nvidia's role in the ascension of AI is as the infrastructure backbone of high-compute data centers. The company's A100 and H100 graphics processing units (GPUs) likely account for between 80% and 90% of the GPUs currently being used in AI-accelerated data centers. With A100 and H100 production set to expand in 2024, and Nvidia's sales and profits skyrocketing, it's easy to understand why Nvidia has outperformed.
There are, however, a handful of factors that suggest the hottest stock in AI is going to have a difficult 2024.
One of the more ironic challenges Nvidia could contend with in the coming year or two is its production expansion. Selling more A100 and H100 GPUs likely sounds fantastic from an investment and operating perspective. But the bulk of Nvidia's data center sales growth through the first nine months of its current fiscal year can be traced to phenomenal pricing power amid GPU scarcity. Being able to increase its sales capacity will almost certainly weigh on its pricing power.
To add to the above, Nvidia will be facing growing competition in the AI-GPU space in the coming quarters. Advanced Micro Devices debuted its MI300X AI-GPU in the second half of 2023, with plans to meaningfully ramp production next year. Brand-name chipmaker Intel also expects to dive headfirst into the high-growth AI-GPU market in 2025 with its Falcon Shores GPU. It's hard to envision a scenario where Nvidia doesn't lose significant pricing power and/or market share over the next 12 to 24 months.
Another problem for Nvidia is that U.S. regulators have continued to limit exports of high-powered chips to China. The world's No. 2 economy generates in the neighborhood of 20% to 25% of Nvidia's net sales. With a lower growth ceiling in China, Nvidia could have an even tougher time meeting Wall Street's lofty growth expectations in the coming quarters.
History is the final concern for Nvidia. Every next-big-thing investment dating back 30 years has navigated its way through an initial bubble, and AI is unlikely to be the exception to the rule. All technologies need time to mature, which makes it unlikely that Nvidia's rapid valuation expansion is sustainable.
