Artificial intelligence (AI) superstar stock Nvidia (NVDA +1.20%) announced a stock split on May 22 this year. Share prices have climbed 36% since then. The wild success could have some other AI companies on Wall Street contemplating following suit (even if the split isn't necessarily the sole reason behind the stock's performance).
Remember, a stock split doesn't change anything about the underlying business or the stock's fundamentals. It just divides the stock into more shares with proportionally lower prices and per-share financials. Companies split their stock for numerous reasons, including making shares easier to buy and sell for employees (who might get them as stock options in lieu of payment) and investors.
With Nvidia finalizing its stock split on June 10, the question that naturally follows is: Which AI companies might be next for a stock split? Three Fool.com contributors identified Microsoft (MSFT +4.64%), Meta Platforms (META +1.41%), and Super Micro Computer (SMCI +0.42%) as those most likely AI stocks to split next.
Here is why.
This venerable tech giant looks primed for a split
Will Healy (Microsoft): As the company that until very recently had the world's most valuable market cap, Microsoft is not a surprising candidate for a stock split. Considering how much stock price appreciation it has seen in the past few years, the surprising thing about Microsoft's stock is that it has been more than 21 years since Microsoft last split its stock.
Between the late 1980s and early 2000s, when Microsoft was the dominated PC operating system company, stock splits were much more common. During that period, the stock split nine times.
NASDAQ: MSFT
Key Data Points
However, the Dot-Com market crash and then the rise of Apple chipped away at Microsoft's leadership over time, particularly after it launched the iPhone in 2007. Between 2000 and 2014, when Steve Ballmer was CEO, Microsoft stock lost 37% of its value.
The state of the company finally improved when Satya Nadella took the CEO position in 2014. He redefined Microsoft as a cloud company and, later, a leader in AI. Over Nadella's 10-year tenure, Microsoft stock has risen more than 1,110%, taking it to $440 per share as of this writing.
Given that level of stock price growth, the need for a split grew as well. The company's growth suggests that stock price appreciation is likely to continue. In the first three quarters of fiscal 2024 (ended March 31), net income increased by 26% year over year. The company's outlook for the rest of the fiscal year points to double-digit percentage revenue growth as well.
Another factor pointing to a stock split involves Microsoft being a component of the Dow Jones Industrial Average. Since the Dow is price-weighted, Microsoft will probably need to split its stock so as not to have an outsized effect on the index's movement. That should ensure that the 21-year stock split drought finally comes to an end.
Meta Platforms has never issued a stock split, but the time may finally be here
Jake Lerch (Meta Platforms): All in all, 2024 has been a great year for the "Magnificent Seven" stocks. Indeed, six of the seven (Tesla being the only exception) have recorded double-digit percentage gains year to date. Yet of these stocks, only one has never split its shares: Meta Platforms. The time for that first-ever split has arrived. Here's why.
NASDAQ: META
Key Data Points
First off, the stock is expensive. A Meta share trades for around $504 -- placing the stock beyond the reach of many retail investors. By implementing a 3-for-1 or even 5-for-1 stock split, Meta could significantly lower its share price and make the stock more accessible to retail investors who might not be able to buy fractional shares, potentially reducing the price to a more reasonable range of $100 to $175.
A recent study from Bank of America revealed another compelling reason for Meta to split its shares: outperformance. The study, which examined stock splits since 1980, found that stocks that were split beat the S&P 500 during the 12 months that followed the split. This was true in each of the last four decades (see chart below).
Image source: Statista
While many investors would likely cheer a Meta stock split, it's far from a given. Meta's management isn't a fan of stock splits. In its 12 years as a public company, Meta has never performed a stock split. That's in stark contrast to other tech megacaps like Adobe and Microsoft, who split their shares four and seven times, respectively, in the first 12 years of their existence as public companies.
At any rate, investors should keep a close eye on Meta Platforms. Stock split or not, the company remains one of the top-performing tech stocks thanks to its lucrative digital advertising business. With its Q1 revenue growing at 27% year over year and earnings soaring 127%, long-term investors would be wise to consider Meta as a buy-and-hold candidate.
Super Micro Computer could opt to refuel its rally with a stock split
Justin Pope (Super Micro Computer): For a while, Super Micro Computer was seemingly the AI version of Robin to Nvidia's Batman. But share prices have stalled and declined after topping out at $1,229. Meanwhile, Nvidia keeps climbing to new highs. Here is why Super Micro Computer, or Supermicro as it's also known, could still get back on track, necessitating a stock split.
NASDAQ: SMCI
Key Data Points
The company sells modular server systems for data centers. This is great for companies that don't have the expertise or time to custom-build their own and just want to deploy compute as quickly as possible. Like Nvidia, Supermicro has become a "go-to" choice as AI spending surges. You can see below how revenue growth has accelerated to 200% year over year, and management has underlined this by noting that demand for its products is dramatically outpacing the broader industry.
SMCI Revenue (Quarterly YoY Growth) data by YCharts
Evidence suggests that Supermicro could benefit from data center tailwinds for some time. According to Newmark, AI will drive enough data center demand to double its power consumption by 2030 from current levels. Supermicro has done nearly $12 billion in trailing-12-month revenue; analysts believe annual revenue could double to over $23 billion by next June.
Meanwhile, the company has a healthy outlook for earnings growth. Analysts believe earnings per share will grow by an average of 52% annually for the next three to five years. In other words, AI tailwinds remain intact, and fundamental strength should eventually push shares higher. Today, the stock trades at a forward P/E of 33, making it a bargain if Supermicro realizes such strong earnings growth. These catalysts could drive Super Micro Computer higher, an exciting prospect for investors.
So why split the stock?
The company has never split its stock despite shares appreciating over 9,400% since its IPO. Now, trading at over $800 per share, the stock is harder to buy and sell (less liquid). It's harder for investors to slowly buy shares over time without having a ton of money. Employees sitting on profitable equity in the company must sell in chunks when shares trade at such a price. Splitting the stock lowers the share price and alleviates these problems. Plus, the positive attention a stock split usually generates could help move the share price again after shares have stalled in recent weeks. It's a potential win-win for everyone.
