Meet the Stock-Split Stock Making Wall Street History, Plus the Nasdaq Stock That Could Split Next

Chipotle Mexican Grill (CMG -1.55%) made history when it announced a 50-for-1 stock split last month. Assuming shareholders approve the amendment at the annual meeting on June 6, the stock will split after the market closes on June 25.

That announcement is historic for two reasons. First, Chipotle has never split its stock since it was founded 30 years ago. Second, it will be one of the biggest stock splits in New York Stock Exchange (NYSE) history, with shareholders receiving 49 additional shares for each share owned.

Stock splits can be useful to investors -- not only because they make shares cheaper, but also because they can spotlight competitively advantaged companies. That is to say, the substantial price appreciation that typically precedes a stock split rarely happens to mediocre companies.

Read on to learn more about Chipotle, plus the Nasdaq stock that could split next.

Chipotle Mexican Grill: The stock split making history on Wall Street

The fourth quarter was difficult for many restaurant businesses because of economic headwinds, but Chipotle reported strong financial results. Revenue increased 15% to $2.5 billion, operating margin expanded 80 basis points, and non-GAAP net income jumped 25% to $10.36 per diluted share. The company opened a record 121 new restaurants during the quarter. Management also highlighted improved throughput and strong same-store sales as key growth drivers.

I want to elaborate on that last point. Chipotle's same-store sales increased 8.4% driven by a 7.4% increase in transactions (more customer traffic) and a 1% increase in the average check (pricing power). Those figures are exceptional compared to the broader restaurant industry, where same-store sales increase just 1.1% in December and customer traffic actually declined 1.7%, according to the National Restaurant Association.

That pattern is nothing new. Chipotle consistently reports above-average growth in same-store sales and transactions because it has built brand loyalty. Specifically, its focus on responsibly raised meats, organically grown produce, and fresh ingredients -- no freezers, no can openers, and no microwaves -- clearly resonates with the market. That competitive advantage should keep the company growing for the foreseeable future, especially when its location count is expected to expand at an annual rate of 8% to 10%.

Going forward, Wall Street expects Chipotle to grow earnings per share at 20% annually over the next five years. That is impressive, but it still makes the current valuation of 66.7 times earnings look pricey. However, Morningstar analyst Sean Dunlop thinks Chipotle will grow earnings per share at 20% annually over the next 10 years. That sustained growth over a longer time period makes the current valuation look more tolerable, though still not cheap.

Personally, I would keep this stock on my watchlist for now. Chipotle is an excellent company and its 50-for-1 stock split is certainly historic. But stock splits themselves have no impact on important business fundamentals, and I question whether Chipotle can produce above-average returns from its current price.

Microsoft: The Nasdaq stock that could split next

Microsoft (MSFT -3.21%) shares rocketed 249% during the last five years. That monster price appreciation qualifies the company as a stock split candidate, but it also points to a probable competitive advantage. Indeed, Microsoft is the largest enterprise software company and the second-largest cloud services provider. Those achievements are built on brand authority, patented technology, and switching costs, meaning that switching software and cloud services providers is a cumbersome process.

Strength in software comes from its business productivity platform (Microsoft 365) and enterprise resource planning platform (Dynamics 365). The former includes office applications like Excel, PowerPoint, and Word, while the latter includes tools for sales, customer service, and supply chain management. In total, Microsoft accounted for 18% of enterprise software sales last year, representing 60 basis points in market share gains from the previous year.

Meanwhile, Microsoft Azure still trails Amazon Web Services in the cloud infrastructure and platform services (CIPS) market, but strength in data management, cybersecurity, and artificial intelligence (AI) have contributed to significant market share gains. Azure accounted for 24% of CIPS spending during the December quarter, representing nearly 200 basis points in market share gains from the previous year. Morgan Stanley expects that to momentum continue, such that Microsoft overtakes Amazon as the market leader by 2027.

Microsoft reported strong financial results in the December quarter, beating expectations on the top and bottom lines. Revenue increased 18% to $62 billion on momentum in office software and Azure cloud services, though the Activision acquisition contributed four points to revenue growth. Meanwhile, non-GAAP net income increased 26% to $2.93 per share because of operating margin expansion, a trend management says will continue in the coming quarters.

Going forward, Microsoft has its most significant opportunities in enterprise software and cloud services, markets forecasted to grow at 14% annually through 2030. But the company has an incremental opportunity in generative artificial intelligence, a market forecasted to grow at 43% annually through 2032. Microsoft is leaning into that opportunity with its generative AI assistant Microsoft 365 Copilot. Additionally, Azure offers a broad range of AI and machine learning services, including the ability to build generative AI software with OpenAI models.

Wall Street expects Microsoft to grow sales at 14% annually over the next five years. Shares currently trade at 13.9 time sales, a premium to the three-year average of 11.6 times sales and a pricey valuation versus Wall Street's consensus sales estimate. But I think analysts are underestimating the company's ability to monetize AI, such that sales may increase one or two points faster over the next five years.

In that scenario, better-than-expected sales growth could lead to above-average returns for patient shareholders. I think investors should consider buying a small position in this stock right now, with the understanding that Microsoft is a $3.1 trillion company that is unlikely to match its five-year return of 249% over the next five years.