Nvidia (NVDA +2.71%) is the latest high-flying tech stock to conduct a stock split, but it won't be the last.
Nvidia's share price increased a whopping 550% from the start of 2023 to the time it announced its 10-for-1 stock split on May 22. That growth was fueled by a rapid rise in demand for generative artificial intelligence (AI). Nvidia's GPUs play a crucial role in developing generative AI applications because they're extremely efficient at training large language models.
With the surging interest in AI, Nvidia couldn't keep up with demand for its GPUs. Prices for its chips soared along with its gross margin and profit. Investors who saw the potential in the current trend have done well by investing in Nvidia.
A stock split doesn't change any of the underlying fundamentals of the business or stock. It just divides the business up into smaller pieces. That said, it can have practical uses. A lower share price is more appealing to retail investors who may be turned off by a four-figure price tag. It also makes stock-based compensation easier to manage for the company. Stock splits may also signal confidence from management that shares are currently priced appropriately and they expect the price to keep climbing. If management thinks shares are overpriced and will eventually decline in value, a stock split wouldn't be necessary.
After AI helped fuel Nvidia's stock to the point where a stock split made sense, two other AI leaders might be considering a stock split in the near future.
Image source: Getty Images.
1. Meta Platforms
Meta Platforms (META +0.40%) is best known for its social media apps Facebook, Instagram, Messenger, and WhatsApp. The four combine to service around 4 billion monthly users.
Behind the scenes, though, artificial intelligence has been a huge focus for the company for well over a decade. AI powers the recommendation algorithms that determine what content and advertisements users see and when they see them. Over the last few years, Meta has stepped up its AI investments. During the company's first-quarter earnings call, CEO Mark Zuckerberg said, "We're in a place where we've shown that we can build leading models and be the leading AI company in the world."
Meta's efforts have already shown good results in its family of apps. Revenue increased 27% year over year in Q1, with net income up 117%. That said, many investors are concerned about the level of spending necessary to build and train Meta's AI models. The company plans to spend $35 billion to $40 billion in capital expenditures this year, with net expenses approaching $100 billion. It's certainly an investment phase for Meta, but it's historically been able to see great returns on its investments over time.
NASDAQ: META
Key Data Points
Despite those concerns, investors continue to pile into the stock. Meta's share price has nearly quadrupled since the start of 2023, reaching an all-time high earlier this year. With share prices hovering around $500, it could be time for its first-ever stock split.
Management has expressed confidence in the stock with a massive share buyback program. And with shares trading around 24x forward earnings, it's one of the less expensive stocks among the "Magnificent Seven" in terms of valuation.
2. Microsoft
Microsoft (MSFT +0.17%) cemented its spot as an AI leader when it added $10 billion to its OpenAI investment in early 2023. The move made its public cloud computing platform, Azure, the top choice for developers looking to capitalize on the AI trend.
The company has leaned heavily into AI. Its Azure OpenAI Service is driving new customers and migrations from competitors, enabling it to gain share in the cloud computing market. It's also managed to roll out new services, giving its existing customers opportunities to spend more on its platform. Overall, Azure revenue grew 31% year over year during the company's third quarter (ended in March).
Microsoft is also injecting AI capabilities into its enterprise software business, which includes its Office productivity suite and its Dynamics sales and marketing software. Its AI feature is called Copilot, which can help users improve productivity and creativity across its various software suites. Copilot has seen a strong uptake among existing customers, and its Copilot Studio allows businesses to use Microsoft's AI foundations and apply them to specific applications.
NASDAQ: MSFT
Key Data Points
Share prices of Microsoft are up 80% since the start of 2023 and the stock trades at well over $400 per share. It's been over 20 years since the company's last stock split. Shares traded for less than $25 each after that split in 2003. It could be time for another.
With shares valued at around 31 times forward earnings estimates, Microsoft trades at a premium to the overall market. However, as it gains market share in the valuable cloud computing space and remains a dominant force in enterprise software, it should be able to keep expanding its revenue and operating margins and grow into that valuation.
