What's rarer than the planets aligning in the night sky? The answer is Wall Street's two hottest trends intersecting: artificial intelligence (AI) and stock splits.
AI, which involves the use of software and systems for tasks that humans would normally undertake or oversee, has the potential to completely change the long-term growth arc for businesses worldwide. In a report released last year, the analysts at PwC estimated AI could add $15.7 trillion to the global economy by 2030. With numbers this large, it's not a surprise to see AI stocks soaring.
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Meanwhile, a stock split is an entirely cosmetic event that allows a publicly traded company to change its outstanding share count and share price by the same factor. It's "cosmetic" in the sense that stock splits don't alter a company's market cap or operating performance.
Stock splits have different purposes, depending on the type of split. A forward-stock split is designed to make shares more nominally affordable for retail investors. On the other hand, a reverse-stock split increases a company's share price in order to meet minimum listing standards on a major stock exchange. Most investors tend to gravitate to companies enacting forward splits, like we've recently witnessed among AI stocks.
Nvidia and Broadcom kick off stock-split mania among artificial intelligence stocks
In a matter of weeks, we've seen the two most-influential AI companies announce stock splits. Nvidia's (NVDA +3.04%) board gave the green light for a 10-for-1 stock split on May 22, which was ultimately completed following the close of business on June 7. Meanwhile, Broadcom (AVGO +0.00%) announced its first-ever stock split (also 10-for-1) on June 12, with an effective date of July 15.
NASDAQ: NVDA
Key Data Points
Nvidia's high-powered graphics processing units (GPUs) have quickly become the must-have chip for businesses operating AI-accelerated data centers. Orders of the H100 GPU have swamped supply, which has allowed Nvidia to dramatically increase the price of these chips and pump up its adjusted gross margin.
According to semiconductor analysis firm TechInsights, Nvidia accounted for 3.76 million of the 3.85 million total AI-GPUs shipped in 2023. Having first-mover advantages, a 98% market share, and a long list of AI-GPU successor architecture (Blackwell and Rubin), gave Nvidia's board every incentive to conduct the company's second split in three years.
As for Broadcom, it's become something of a staple in AI-accelerated networking. The company's Jericho3-AI chip is capable of connecting up to 32,000 GPUs, which can harness their full processing capacity, reduce tail latency, and power the training of large language models and generative AI solutions.
Broadcom has forged a handful of AI partnerships, as well. Last year, it teamed up with Alphabet to improve generative AI cybersecurity on Google Cloud. More recently, Broadcom forged a working relationship with Dell Technologies to supply the latter with the AI connectivity solutions that its customers are looking for.
But it's not just AI stocks that look primed for stock splits. What follows are the three most-logical candidates to become Wall Street's next stock-split stocks.
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Costco Wholesale
The first stock that seems like a no-brainer to announce a split sooner than later is warehouse club Costco Wholesale (COST 0.71%). Not including the spin-off of Price Enterprises in 1994, Costco has conducted three splits since becoming a public company, the last of which occurred in January 2000. With its shares closing at an all-time high of nearly $856 on June 14, the stage is absolutely set for a stock split.
Costco's vast outperformance of the benchmark S&P 500 over multiple decades boils down to its undeniable competitive advantages, the first of which is its size. Buying its products in bulk helps to reduce the cost of each unit it purchases. This allows it to undercut local shops and even national grocery chains on price. The company's management team learned a long time ago that price advantages help to draw consumers into its stores.
To add to this point, Costco has been quite successful getting its members to purchase items not on their shopping lists. Though grocery items have razor-thin margins, discretionary purchases have a tendency to lift Costco's operating margin.
The other advantage for Costco is its membership model. Paying $60 or $120 for an annual membership is going to encourage consumers and businesses to get the most bang out of their membership buck. In other words, they're going to make Costco their one-stop destination whenever possible. The high-margin subscription revenue Costco brings in buffers its razor-thin margins on groceries.
NASDAQ: MSTR
Key Data Points
MicroStrategy
Another logical candidate to conduct a stock split is enterprise-analytics software provider MicroStrategy (MSTR +6.22%). MicroStrategy completed a 2-for-1 split in January 2000, but was compelled to conduct a reverse 1-for-10 split in July 2002 to ensure continued listing on the Nasdaq stock exchange following the dot-com bubble bursting. Shares of the company ended last week at almost $1,496 per share.
Although MicroStrategy has its analytics software operations, the lion's share of its nearly $27 billion valuation is based on its ties to Bitcoin (BTC +6.00%). CEO Michael Saylor, who strongly believes that Bitcoin is the future, has overseen the acquisition of around 214,400 Bitcoin for his company. Based on a fully mined supply of 21 million tokens for Bitcoin, MicroStrategy owns more than 1% of the world's largest cryptocurrency by market value.
The company also borders on being a meme stock. Most cryptocurrency-driven businesses are heavily influenced by retail investors who aren't too focused on traditional fundamental valuation metrics. A share price that's nearing $1,500 can be a constraint for retail investors without access to fractional-share purchases.
But unlike Costco, there are no competitive advantages with MicroStrategy. Though it is the largest publicly listed holder of Bitcoin, the company's software sales have been trending lower for a decade.
Its valuation is even more worrisome. Whereas approximately 214,400 Bitcoin have a current market value of $14.2 billion, MicroStrategy's Bitcoin holdings are being valued at close to an 80% premium. Given Bitcoin's deficiencies as a currency and investment, MicroStrategy is a potential stock-split stock worth avoiding.
NASDAQ: META
Key Data Points
Meta Platforms
The third logical candidate to become Wall Street's next stock-split stock is the only member of the "Magnificent Seven" that's never conducted a split: social media maven Meta Platforms (META +0.99%). Since going public in May 2012, shares of Meta have gained more than 1,200%, with shares ending at more than $500 on June 14.
Meta's outperformance has everything to do with its premier social media "real estate." It's the owner of Facebook, the most-popular social media platform globally, as well as Instagram, WhatsApp, Facebook Messenger, and Threads. Collectively, all of its apps helped to attract a whopping 3.24 billion daily active users in the March-ended quarter. Businesses are willing to pay an ad premium to get their message(s) in front of Meta's broad audience.
Beyond its foundational ad revenue, Meta is also gaining traction for its AI ambitions. Meta's money-losing Reality Labs segment is aggressively investing in virtual/augmented reality devices, the metaverse, and AI solutions. While Reality Labs has been a drag on the bottom line, Meta CEO Mark Zuckerberg has a lengthy and successful track record of developing new platforms and waiting until they've matured to fully monetize them.
The last puzzle piece that explains Meta's ongoing success is its bountiful balance sheet. Meta closed out March with over $58 billion in cash, cash equivalents, and marketable securities, and has generated more than $76 billion in operating cash flow on a trailing-12-month basis. There's little reason to believe its shares aren't headed higher over the long run, which makes a stock split all the more logical.
