Stock splits have been all the rage in recent years and have become a calling card among many of the market's most successful companies. The group of stocks collectively known as the "Magnificent Seven" has handily outperformed the S&P 500 since the start of last year.
Here's how the member companies have performed since the beginning of 2023:
- Nvidia: Up 686%
- Meta Platforms (META +1.41%): Up 297%
- Amazon: Up 112%
- Alphabet: Up 96%
- Microsoft: Up 72%
- Apple: Up 49%
- Tesla: Up 43%
Stock splits are historically preceded by a long period of strong business and operating performance, which gives rise to a surging stock price.
It's also no coincidence that over the past several years, most of these companies have initiated at least one stock split. Investors might be surprised to learn, however, that just one of the Magnificent Seven companies has never split its shares. However, given the company's recent performance, the prevailing tailwinds, and ongoing macroeconomic recovery, the final holdout -- Meta Platforms -- might finally consider a stock split.
Image source: Getty Images.
Unparalleled social media reach
Normally, when you see the word "unparalleled," it tends to be hyperbole, but in the case of Meta Platforms, it happens to be true. The company has unparalleled reach with its suite of social media platforms, which includes three of the world's largest when measured by monthly active users. In the first quarter, Meta's family of apps reached 3.24 billion people or roughly 40% of the worldwide population.
That extensive reach, combined with the company's massive treasure trove of user data, allows Meta to more effectively target the advertising that generates the bulk of the company's revenue.
Marketing demand dried up in the face of the downturn, but a rebound in ad spending has already begun. Furthermore, estimates regarding market growth have begun to ratchet higher, with digital ad revenue expected to grow by 11% this year, according to estimates by S&P Global. As the world's second-largest digital advertiser, Meta Platforms is well positioned to benefit from the increase in ad spending.
The AI wildcard
Another factor that could fuel Meta's fortunes is the rise of artificial intelligence (AI). The company tapped into the aforementioned treasure trove of data to train its Llama (Large Language Model Meta AI), the model that forms the foundation for its Llama 3, which Meta describes as "one of the world's leading AI assistants." The company charges large cloud providers to include Llama in their offerings, but it's free to users.
NASDAQ: META
Key Data Points
CFO Susan Li said on an earnings call in April, "We continue to see compelling investment opportunities to both improve our core business in the near term and capture significant longer-term opportunities in generative AI and Reality Labs." Meta has been integrating generative AI into a broad cross section of its offerings, including providing AI-powered tools to advertisers on its platform and using AI to surface more relevant content for users.
It's still early days for AI, so we don't yet know the full extent of how Meta will leverage the technology to boost its business and financial performance -- but the potential is there.
Is a stock split on the horizon?
History shows that stock splits tend to come in waves, a point highlighted by Bank of America analyst Jared Woodard. The analyst noted that Nvidia is "another large-cap tech pursuing shareholder-friendly policies." The chipmaker is the fourth of the Magnificent Seven stocks to pursue a stock split since 2022, preceded by Alphabet, Amazon, and Tesla. "Big Tech is going bite-sized," the analyst wrote in a note to clients.
Woodard went on to point out that companies begin to consider enacting a stock split once their share price surpasses a threshold of about $500.
There's more good news on the stock split front. Companies that pare their shares tend to outperform the S&P 500 in the year following the split. "Stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index. Splits have boosted returns in every decade including the early 2000s when the S&P 500 struggled," the analyst wrote.
Meta Platforms has a sterling track record of long-term growth. Over the past decade, its revenue has grown 1,150%, while net income has soared 1,460%. This has driven its stock price up more than 656%, more than 3 times the return of the S&P 500. Yet the stock is currently selling for 27 times earnings, on par with the S&P 500, despite its superior performance.
With a stock price of roughly $475 (as of this writing), Meta is approaching the threshold at which companies begin considering a stock split, according to the research. While this is all speculation on my part, I wouldn't be surprised if Meta were to announce a stock split later this year, if for nothing more than to get investors excited about its stock once again.
