Investing on Wall Street can sometimes feel like a roller-coaster ride. Over the past four years, the stock market's three major indexes have vacillated between bear and bull markets with each passing year.
Although volatility is inherent on Wall Street, wild swings often encourage investors to seek out the safety of companies that offer a history of outperformance. For the past decade, the FAANG stocks are a good example of a group of companies that have excelled. But over the past two years and change, it's businesses enacting splits that have garnered the attention of investors.
Image source: Getty Images.
A stock-split is an event that allows a publicly traded company to alter its share price and outstanding share count by the same magnitude, without having any impact on its market cap or daily operations. A forward-stock split is used to make shares of a company more nominally affordable for everyday investors, while a reverse-stock split increases a company's share price to ensure it meets the minimum listing requirements of a major stock exchange.
Most investors -- and this includes Wall Street professionals -- are honed in on forward-stock splits. Since July 2021, nine high-profile outperformers have conducted forward splits:
- 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
Among these nine stock-split stocks are three highfliers that a select group of Wall Street analysts believe offer upside of as much as 128% upside in 2024.
Nvidia: Implied upside of 128%
The stock-split stock with the greatest upside potential in the new year, according to one Wall Street analyst, is semiconductor company Nvidia. Analyst Hans Mosesmann of Rosenblatt Securities has a lofty $1,100 price target on shares of Nvidia. Based on its closing price of $483.50 on Dec. 14, this represents a potential gain to shareholders of 128% in 2024.
Mosesmann's optimism for the top-performing megacap stock of 2023 has to do with its role as the infrastructure backbone of the artificial intelligence (AI) movement. Nvidia's A100 and H100 graphics processing units (GPUs) account for between 80% and 90% of the share of GPUs currently deployed in high-compute data centers.
With chip fabrication company Taiwan Semiconductor Manufacturing looking to potentially double its chip of wafer on substrate capacity over the next year, the expectation is that Nvidia's ability to meet strong demand for its A100 and H100 chips will improve. More units to sell should increase Nvidia's sales and profits next year.
However, there's another side to this story. More specifically, Nvidia's doubling sales in its current fiscal year is almost exclusively the result of exceptional pricing power caused by AI-GPU scarcity. As it increases its own production, and new competitors enter the arena -- Advanced Micro Devices (AMD 2.37%) and Intel (INTC -9.20%) -- there's a good likelihood that Nvidia's pricing power and gross margin will take a hit.
AMD introduced its MI300X GPU for AI-accelerated data centers in June, but expects to ramp up production in 2024. Meanwhile, Intel intends to bring its Falcon Shores GPU to market in 2025, which will be a direct competitor to Nvidia. Things may be as good as they're going to get for Nvidia.
The last thing to note about next-big-thing investments is that they have a strong tendency to form early stage bubbles. Investors have overestimated the demand or uptake of every major trend for the past three decades, and I doubt AI is going to be the exception. This makes reaching Mosesmann's $1,100 price target for Nvidia highly unlikely.
Amazon: Implied upside of 56%
A second stock-split stock with incredible upside in 2024, based on the price target of at least one bullish Wall Street analyst, is e-commerce giant Amazon. According to analyst Alex Haissl of Redburn Atlantic, Amazon's stock can hit $230 per share. If Haissl proves accurate, shareholders would enjoy upside of 56% in the new year.
The biggest knock against Amazon is that its top revenue segment is cyclical. It generates most of its sales from its world-leading online marketplace. If economic growth slows or a recession takes shape domestically or abroad, it wouldn't be a surprise to see Amazon's online revenue decline.
But here's the thing about Amazon: Its e-commerce segment isn't all that important to its cash flow generation or profitability. Rather, a trio of ancillary segments are what will power the company forward.
No segment is more critical to Amazon's success than Amazon Web Services (AWS). AWS accounted for 31% of global cloud infrastructure services spend, as of the September-ended quarter. Not only is enterprise cloud spending still in its early innings, but cloud-service margins run circles around razor-thin online retail sales margins. Despite accounting for around a sixth of Amazon's net sales, AWS is responsible for the bulk of the company's operating income.
Subscription services is another key division for Amazon. Back in April 2021, then-CEO Jeff Bezos noted that more than 200 million people had signed up for a Prime subscription. These subscriptions keep users loyal to Amazon's ecosystem of products and services, as well as generate predictable cash flow.
The third ancillary segment of interest is advertising services. With Amazon attracting more than 2 billion unique visitors to its website each month, it's no surprise that advertisers will pay a premium to get their message in front of potentially motivated shoppers.
Amazon remains historically cheap relative to its future cash flow potential.
Deliveries of the Cybertruck began in late November. Image source: Tesla.
Tesla: Implied upside of 51%
The third stock-split stock offering mouthwatering upside in 2024, based on the prognostication of one Wall Street analyst, is electric-vehicle (EV) maker Tesla. Analyst Adam Jonas at Morgan Stanley, who has a history of placing lofty price targets on Tesla's stock, expects shares to reach $380. Should Jonas's forecast be reached, Tesla's shares would appreciate by 51% in the new year.
The most front-and-center catalyst for Tesla is the ongoing rollout of its Cybertruck. Deliveries of the company's fifth production model (3, S, X, and Y being the other four) began at the end of November. What'll be of interest is whether refundable cash deposits for Cybertruck, which previously topped 1 million, according to CEO Elon Musk, translate into actual orders.
Additionally, Tesla is the only pure-play EV maker that's generating a recurring profit on the basis of generally accepted accounting principles (GAAP). While legacy automakers are profitable as a whole, their EV divisions are bleeding red. Tesla's first-mover advantages, coupled with its recuring GAAP profits, have made it a popular stock to own.
But like Nvidia, Tesla has a number of challenges that lie ahead, which have the potential to lead to a breakdown. For starters, the company initiated a price war with its competitors earlier this year, which is wreaking havoc on its margins. Tesla has slashed the sales price on its four production models (i.e., not counting Cybertruck), leading to a more-than-halving of its operating margin over the trailing-12-month period (17.2% to 7.6%).
According to Musk, his company's pricing strategy is dictated by demand. With Tesla reducing the sales price of its production models on more than a half-dozen occasions, it signals that both demand is down and inventory levels are rising.
Another issue for Tesla is its CEO. Aside from drawing the ire of securities regulators on a couple of occasions, Musk has a habit of overpromising and underdelivering when it comes to new vehicles and innovations. Tesla's market cap has a number of promised innovations baked in, but many of these promises have, thus far, gone unfulfilled.
Lastly, Tesla's valuation is already otherworldly. Whereas most automakers trade at price-to-earnings ratios of 6 to 8, Tesla's forward-year earnings multiple is 71. Reaching Jonas's price target in 2024 looks virtually impossible.
