Although most investors are captivated by the long-term potential of artificial intelligence (AI), companies enacting stock splits are an equally hot trend on Wall Street.
A stock split is an event that allows publicly traded companies an opportunity to cosmetically alter their share price and outstanding share count. It's superficial in the sense that stock splits don't affect a company's market valuation or operating performance.
Image source: Getty Images.
The two variations of stock splits are forward and reverse. With a forward-stock split, companies are purposely reducing their nominal share price to make it more affordable for everyday investors and/or their employees. Meanwhile, a reverse-stock split is aimed at increasing a company's share price, often with the goal of meeting continued listing standards on a major stock exchange.
Although some reverse-stock splits can be long-term winners, most investors tend to focus their attention on public companies conducting forward splits. High-flying stocks in need of a forward split are usually out-executing and out-innovating their competition.
Since 2024 began, in the neighborhood of a dozen high-profile companies have announced and/or completed a stock split -- but none have garnered more attention than AI titan Nvidia (NVDA +0.93%).
Nvidia was the most-anticipated stock split of 2024 on Wall Street
Since its initial public offering (IPO) in January 1999, Nvidia has completed six forward splits. The latest was announced by the company's board on May 22 -- a 10-for-1 stock split -- with an effective date of June 7. At the snap of a finger, Nvidia's share price of more than $1,200 was adjusted to a little north of $120.
The reason Nvidia required its largest stock split since going public has everything to do with its AI dominance.
NASDAQ: NVDA
Key Data Points
Since the start of 2023, Nvidia's AI-focused graphics processing units (GPUs) have become the undisputed standard in high-compute data centers. By some estimates, the company holds a virtual monopoly on the AI-GPUs that were shipped for use in enterprise data centers last year.
On top of being the preferred hardware provider for AI-accelerated data centers, demand for the company's H100 GPU has overwhelmed supply. Even with world-leading foundry services company Taiwan Semiconductor Manufacturing rapidly upping its chip-on-wafer-on-substrate capacity for high-bandwidth memory packaging, Nvidia is nowhere close to meeting enterprise demand for its chips. As a result, it's been able to meaningfully increase the selling price of its GPUs, which has provided a hearty boost to its adjusted gross margin.
Nvidia has plans to retain its first-mover advantages, as well. While most external competitors are playing catch-up to the H100, Nvidia is expected to release its next-generation AI-GPU architecture, known as Blackwell, later this year. Blackwell offers computational improvements in six areas, including quantum computing, generative AI solutions, and engineering simulation, to name a few. In June, CEO Jensen Huang teased the eventual rollout of its Rubin GPU architecture by 2026.
Nvidia's 10-for-1 stock split has laid a path for other fast-growing, market-leading businesses to follow. Interestingly enough, two other members of the "Magnificent Seven" might be next to answer the call.
Image source: Getty Images.
Two Magnificent Seven components appear ready to become Wall Street's next stock-split stocks
As a quick refresher, the Magnificent Seven account for seven of the largest and most-influential businesses in America. Listed in order of descending market cap, the Magnificent Seven stocks are:
- Microsoft (MSFT +1.01%)
- Apple (AAPL +0.11%)
- Nvidia
- Alphabet (GOOGL 0.57%)(GOOG 0.20%)
- Amazon (AMZN 0.38%)
- Meta Platforms (META 0.82%)
- Tesla (TSLA 5.42%)
Microsoft, Apple, and Nvidia have market valuations in excess of $3 trillion; Alphabet and Amazon are valued at north of $2 trillion; Meta is worth close to $1.4 trillion; and while Tesla is currently below $1 trillion, it's previously topped this psychological level.
Among Nvidia's six peers in the Magnificent Seven, two are primed to become Wall Street's next stock-split stocks.
NASDAQ: META
Key Data Points
Meta Platforms
The first Magnificent Seven component that's long overdue for a stock split is the only member that's yet to ever complete one. I'm talking about social media colossus Meta Platforms. Shares of the company have risen by more than 1,300% since its debut in 2012, with the company's stock tipping the scales at roughly $540, as of the closing bell on July 5.
Though Meta is among the basket of companies undeniably benefiting from the AI revolution, it would be well-insulated if the AI bubble were to burst at some point in the future. That's because nearly 98% of Meta's sales can be traced to advertising on its social media platforms.
Meta is the parent company behind Facebook, the most-visited social platform globally, as well as Instagram, WhatsApp, Facebook Messenger, and Threads. These are some of the world's most-downloaded social apps, and they collectively helped to attract 3.24 billion daily active users during the March-ended quarter. Businesses are well aware that no other social media company offers access to more eyeballs than Meta, which is what affords the company such exceptional ad-pricing power.
Something else working in Meta's favor is its treasure trove of cash. As of March 31, Meta was sitting on more than $58 billion in cash, cash equivalents, and marketable securities. To boot, it's also generated north of $76 billion in cash from its operations over the trailing-12-month (TTM) period. CEO Mark Zuckerberg has the luxury of betting big on AI data centers, the metaverse, and augmented/virtual reality devices thanks to his company's immense cash-flow generation.
With Meta's stock well over $500 and the company's long-term growth prospects improving, its very first stock split would seem to be in the cards.
NASDAQ: MSFT
Key Data Points
Microsoft
The second Magnificent Seven member that looks ready to follow in Nvidia's footsteps and become Wall Street's newest stock-split stock is software and cloud juggernaut Microsoft.
Since its March 1986 IPO, Microsoft has conducted nine forward splits. However, the last stock split it completed was back in February 2003! With the world's largest company by market cap closing the July 5 session at $467.56 per share, the ingredients are on the table for Microsoft to announce a stock split.
The beauty of Microsoft's operating model is that it relies on sizable margins from its legacy operations to fund its high-growth initiatives. Although iconic software segments like Windows and Office aren't growing like they once were, the exceptional moats and margins associated with these divisions provide Microsoft with plenty of cash to reinvest in the cloud and AI, or perhaps deploy when making acquisitions.
The bread-and-butter to Microsoft's future looks to be cloud infrastructure service platform Azure. While Microsoft has AI and cloud ties in other operating segments, Azure is consistently its fastest-growing segment -- 31% constant-currency sales growth in the fiscal third quarter (ended March 31). Azure ranks second to Amazon Web Services in global cloud infrastructure service market share.
Similar to Meta Platforms, Microsoft's balance sheet and cash-flow generation afford it the ability to take risks that few other companies can match. It closed out the fiscal third quarter with $80 billion in cash, cash equivalents, and short-term investments, and has generated $110 billion in operating cash flow over the TTM period. This is what allowed Microsoft to acquire gaming giant Activision Blizzard last year for $68.7 billion in an all-cash deal.
What better way for the world's largest public company to excite Wall Street and its shareholders than by being the next Magnificent Seven component to announce a stock split.
