Guarantees are virtually nonexistent on Wall Street... with the exception of volatility. Short-term movements in the stock market's major indexes are consistently unpredictable. During periods of heightened volatility (especially to the downside), it's not uncommon for investors to seek the safety of industry-leading businesses that have historically outperformed the benchmark S&P 500.
Although the FAANG stocks have been popular with investors for years, companies enacting stock splits have been drawing a bigger audience during periods of uncertainty.
Image source: Getty Images.
A "stock split" is an event where a publicly traded company alters its share price and outstanding share count by the same magnitude. It's a purely cosmetic move that has no impact on a company's market cap or operating performance.
Stock spits come in two forms: forward and reverse. A forward-stock split lowers a company's nominal share price to make it more affordable to buy for retail investors without access to fractional-share purchases. Conversely, the purpose of a reverse-stock split is to increase a company's share price to ensure it meets the minimum continued listing standards on a major stock exchange.
While some reverse-stock splits have gone on to be successful over the long run (pull up a long-term chart of Booking Holdings if you don't believe me), most investors are focused on companies enacting forward splits. Highfliers conducting forward splits are often out-innovating and out-executing their peers. In short, they're just the type of businesses we'd expect to outperform over the long run.
But not all of Wall Street is convinced that certain stock-split stocks are headed higher. Based on low-water price targets from select Wall Street analysts, the following three stock-split stocks could plunge by as much as 29%!
NASDAQ: NVDA
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Nvidia: Implied downside of 22%
The first stock-split stock that at least one analyst believes could fall off a bit of a cliff is none other than artificial intelligence (AI) juggernaut Nvidia (NVDA +0.10%). Nvidia recently announced its intent to conduct a 10-for-1 forward split, which follows up a 4-for-1 split completed in July 2021.
According to analyst Gil Luria of D.A. Davidson, Nvidia is worth $900 per share. If this were the price target a year ago, Luria would be viewed as one of the most bullish analysts on Wall Street. But with shares of Nvidia closing at just north of $1,148 on May 29, it implies the top-performing megacap since the start of 2023 could tumble 22%.
On the surface, Nvidia has been firing on all cylinders. The company's H100 graphics processing units (GPUs) are the clear top choice by businesses operating AI-accelerated data centers. As a result, its pricing power has been off the charts and its gross margin has exploded to the upside.
Unfortunately for Nvidia, competition is unavoidable. During the third quarter, Intel is expected to roll out its Gaudi 3 AI-accelerator chip to its customers. Meanwhile, Advance Micro Devices has been increasing production of its MI300X GPU, which is also tasked with going head-to-head against Nvidia's H100 chips in high-compute data centers.
The bigger concern, as I've pointed out on numerous occasions, is that Nvidia's top customers are all developing AI-GPUs of their own. Microsoft, Meta Platforms, Amazon, and Alphabet account for roughly 40% of Nvidia's sales, but are complementing Nvidia's H100 chips with in-house GPUs. This year likely marks a peak in orders, gross margin, and GPU pricing power for Nvidia.
Lastly, history looks as if it'll catch up with Nvidia. There hasn't been a next-big-thing investment in three decades that's avoided a bubble-bursting event. While artificial intelligence likely has a bright future, initial adoption and uptake of the technology will almost certainly be more challenging than investors anticipate. If the AI bubble bursts, no company will be hit harder than Nvidia.
Image source: Getty Images.
Amphenol: Implied downside of 29%
A second stock-split stock that one Wall Street pundit foresees plunging in the not-too-distant future is electronic components giant Amphenol (APH +2.44%). On May 20, Amphenol's board approved a 2-for-1 forward split that's expected to take effect on June 11.
Despite Amphenol running circles around the benchmark S&P 500 since the start of 1990 -- a nearly 46,000% gain for Amphenol, compared to roughly 1,240% for the S&P 500 -- Stifel analyst Matthew Sheerin has a tepid outlook for the company. Sheerin's $95 price target implies shares of Amphenol will retrace 29% and shed roughly $23 billion in market cap in the process.
The most logical reason for Sheerin to be skeptical of Amphenol is the company's valuation.
Amphenol's secret to success is its bulk manufacturing of electric and fiber optic connectors, coaxial cables, and a host of other generally cheap components. It's a company that's been able to win the volume game and generate solid margins in the process.
NYSE: APH
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But at the moment, it's trading at north of 34 times forward-year earnings per share (EPS) with a forecast annualized earnings growth rate of 13.4% over the coming five years. By comparison, Amphenol has averaged a forward P/E multiple of 27 over the trailing-five-year period. With the exception of a relatively short span in early 2018, investors have to go back to the dot-com bubble to find the last time shares of Amphenol were this pricey on a trailing-12-month basis.
Amphenol is also cyclical, and there are a couple of predictive indicators that suggest trouble could be on the horizon for the U.S. economy. For example, the first meaningful decline in U.S. money supply since the Great Depression portends economic weakness. If the U.S. or global economy slips into a recession, electronic component orders would be expected to slow.
Lam Research: Implied downside of 24%
The third stock-split stock that can plummet, based on the prognostication of one Wall Street analyst, is semiconductor wafer fabrication equipment company Lam Research (LRCX 3.77%). Lam's board authorized a 10-for-1 forward split on May 21, which is expected to become effective before the opening bell on October 3.
Similar to Walmart and Chipotle Mexican Grill, which announced respective 3-for-1 and 50-for-1 forward splits earlier this year, Lam's stock split is designed to make shares more nominally affordable for its employees, so they can participate in the company's employee stock plans.
NASDAQ: LRCX
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But following a 1,440% gain in shares of Lam Research over the trailing-10-year period, Morgan Stanley analyst Joseph Moore isn't a fan. Moore's $720 price target for Lam suggests that this leading wafer equipment provider could slump by 24% over the next year.
One reason Moore might be down on Lam Research, at least based on its current share price of $953, is because U.S. regulators are doing the semiconductor equipment industry no favors. Just as regulators restricted exports to China of Nvidia's high-powered A100 and H100 AI-GPUs twice over the last two years, they've also limited the export of wafer fabrication equipment to the world's No. 2 economy by gross domestic product. These export restrictions are clearly limiting Lam's ability to take advantage of the AI revolution.
Valuation is another obvious concern. Over the trailing-five-year period, Lam Research has traded at roughly 4.7 times sales and 17 times forward EPS. Shares are currently valued at 7.1 times next year's consensus sales and nearly 27 times forward-year earnings. It's a lofty price to pay for a highly cyclical industry.
Finally, Moore might be concerned about economic headwinds. While the U.S. economy continues to chug along (to Lam Research's benefit), persistent month-to-month declines in the Conference Board Leading Economic Index (LEI) point to second-half weakness for the U.S. economy. Meanwhile, as noted, the decline in M2 also signals trouble. Cyclical companies that trade at a premium are often hit hardest during short-lived economic contractions.
