Volatility is a given when putting your money to work on Wall Street. However, volatility has been heightened for a majority of the decade. Over the previous four years, Wall Street's major stock indexes have bounced between bear and bull markets in successive years.
When volatility and uncertainty rule the roost on Wall Street, investors have a tendency to seek out the safety of time-tested and outperforming industry leaders. A perfect example over the past decade has been the "FAANG stocks." But since the midpoint of 2021, companies enacting stock splits have been especially popular.
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Investors have been gravitating to stock-split stocks for years
A "stock split" is an event that allows a publicly traded company to change both its share price and outstanding share count without having any impact on its market cap or operating performance. Think of it as a purely cosmetic change that can either make shares more nominally affordable for everyday investors (i.e., a forward-stock split), or can increase a company's share price to ensure continued listing on a major stock exchange (i.e., a reverse-stock split).
Although some companies that have enacted reverse splits have gone on to deliver big-time gains to their shareholders, the bulk of investors' interest in stock-split stocks lies with those conducting forward splits.
For more than a year, I've been highlighting nine of the most high-profile and widely owned businesses to have completed forward splits since July 2021. In chronological order, this includes:
- Nvidia (NVDA 6.18%): 4-for-1 split in 2021.
- Amazon (AMZN 3.43%): 20-for-1 split in 2022.
- DexCom (DXCM -9.90%): 4-for-1 split in 2022.
- Shopify (SHOP 1.11%): 10-for-1 split in 2022.
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split in 2022.
- Tesla (TSLA -1.11%): 3-for-1 split in 2022.
- Palo Alto Networks (PANW 0.91%): 3-for-1 split in 2022.
- Monster Beverage (MNST 0.41%): 2-for-1 split in 2023.
- Novo Nordisk (NVO 0.84%): 2-for-1 split in 2023.
Aside from the similarity of completing a forward-stock split and handily outperforming the benchmark S&P 500 over long periods, these nine former stock-split stocks all bring easily identifiable competitive advantages and/or seemingly untouchable moats to the table.
- Nvidia's graphics processing units (GPUs) are expected to account for around 90% of the share of GPUs in use in artificial intelligence (AI)-accelerated data centers this year.
- Amazon's online marketplace brings in about 40% of online retail sales in the U.S., while Amazon Web Services is the world's leading cloud infrastructure services provider.
- DexCom is a top-two player in continuous glucose monitoring systems (CGMs) and has developed numerous generations of CGMs for diabetics.
- Shopify is the leading provider of e-commerce software platforms in the United States, as of 2023.
- Alphabet's Google accounted for more than 91% of worldwide internet search share in January, while Google Cloud is the global No. 3 in cloud infrastructure services share.
- Tesla is North America's leading electric-vehicle (EV) maker and the only pure-play EV producer that's generating a recurring profit.
- Palo Alto Networks is one of the largest next-generation firewall solutions providers in the cybersecurity space.
- Monster Beverage is the second-leading provider of energy drinks in the U.S., with a 30% share in 2023.
- Novo Nordisk is a dominant player in the global insulin market, as well as a key innovator of injectable GLP-1 drugs, which have induced weight loss in patients.
More importantly, among these nine former stock-split stocks are two companies that appear ripe for yet another split.
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Nvidia
Out of the nine high-profile stock-split stocks over the past two-and-a-half years, none has a more compelling case to conduct yet another split than semiconductor stock Nvidia. When Nvidia enacted its 4-for-1 split in July 2021, its share price was at roughly $750. Last week, Nvidia's stock hit a fresh (split-adjusted) all-time high of just over $700 per share.
As noted, artificial intelligence is the driving force behind Nvidia's surging sales and profits. The company's A100 and H100 GPUs have been the clear top choice by businesses looking to incorporate AI solutions and generative AI into their growth strategies.
What's been particularly helpful for Nvidia is that demand for AI-fueled GPUs has handily outstripped the supply of these chips. Though Nvidia would probably love to sell more of its A100 and H100 chips, this scarcity has sent the price for existing AI-GPUs into the stratosphere. Whereas Nvidia's cost of revenue has only modestly moved higher, data center sales should have more than doubled in fiscal 2024 (which ended in late January).
It's also worth pointing out that leading chip-fabrication company Taiwan Semiconductor Manufacturing is in the process of dramatically increasing its chip-on-wafer-on-substrate (CoWoS) capacity. CoWoS is a practical necessity in high-compute data centers given the need to incorporate high-bandwidth memory. Thus, Taiwan Semi's actions should help Nvidia meaningfully ramp production in the current calendar year.
Nevertheless, red flags remain with Wall Street's hottest artificial intelligence stock -- and not even a potential stock split will whisk them away.
Nvidia is beginning to see competition take shape both externally and internally. Advanced Micro Devices introduced its MI300X AI-GPU last year, while Intel unveiled its Gaudi3 chip as a direct competitor to Nvidia's H100 generative AI software chip in December. Meanwhile, Nvidia's top revenue customers, Microsoft and Meta Platforms, are in the process of developing AI chips of their own to lessen their reliance on Nvidia.
To boot, every next-big-thing investment trend over the last 30 years has worked its way through an initial bubble. The fear of missing out (better known as "FOMO") has a tendency to lift investor expectations well ahead of tangible demand with next-big-thing trends. Artificial intelligence is unlikely to be the exception.
Palo Alto Networks
The other former stock-split stock that appears ready for round two is none other than cybersecurity company Palo Alto Networks. When Palo Alto effected its 3-for-1 forward split in mid-September 2022, its share price was near $550. In the 17 months since conducting its split, shares of the company have more than doubled and are approaching $370.
The beauty of cybersecurity is that it's become nothing short of a basic necessity for businesses with an online or cloud-based presence. Regardless of how well or poorly the U.S. economy is performing, businesses with an online or cloud presence need cybersecurity solutions to protect their data and that of their customers from hackers and robots that don't take a day off.
The catalyst that's really helped power Palo Alto Networks' gains over the past five years is its purposeful shift away from physical firewall products and toward cloud-based software-as-a-service (SaaS) solutions. By the end of fiscal 2018 (the company's fiscal year ends July 31), less than 62% of Palo Alto's net sales were traced back to subscriptions and support. As of the end of the first quarter of fiscal 2024 (ended Oct. 31, 2023), nearly 82% of its sales derived from subscriptions and support.
A cloud-based SaaS operating model is genius for a number of reasons. First, the incorporation of AI and machine learning allows Palo Alto's solutions to be nimbler and more responsive than on-premises security solutions. A subscription-based model also helps with customer retention and can lead to more consistent payouts from clients throughout the year, relative to physical firewall products. And third, a cloud-based SaaS model generates considerably juicier margins than selling physical firewall products.
Add-on sales are another reason Palo Alto Networks has been virtually unstoppable. The company's high-margin Prisma Cloud platform saw the number of customers purchasing five or more cloud modules grow by a jaw-dropping 166% in the fiscal first quarter, compared to the prior-year period. Palo Alto is landing bigger clients, and it's having success getting many of its larger clients to progressively spend more.
Although Palo Alto Networks' stock is historically pricey, average annual earnings growth of at least 20% is a real possibility through the end of the decade, if not well beyond.
