Within the last two weeks, we've witnessed the ageless Dow Jones Industrial Average, benchmark S&P 500, and growth stock-inspired Nasdaq Composite catapult to record closing highs. While excitement surrounding the rise of artificial intelligence (AI) has played an undeniable role in sending the broader market higher, don't overlook the other key trend powering the indexes to new heights: Stock-split euphoria.
A stock split is an event that allows a publicly traded company to adjust its share price and outstanding share count, all while having no effect on its market cap or operating performance. It's a purely cosmetic maneuver that's often effected with purpose.
Image source: Getty Images.
Stock splits come in two varieties: Forward and reverse. Companies conducting forward-stock splits are aiming to make their shares more nominally affordable for retail investors and their employees. Meanwhile, businesses enacting reverse-stock splits are purposely increasing their share price, usually with the goal of maintaining minimum share price listing standards on a major stock exchange.
Although some companies completing reverse-stock splits have gone on to be wildly successful, most reverse splits are enacted from a position of weakness. Comparatively, high-flying stocks that need to reduce their share price to make it more nominally affordable for investors and employees are typically out-executing their competition. This disparity is why most investors tend to gravitate to companies enacting forward-stock splits.
Since 2024 began, in the neighborhood of a dozen top-tier businesses have announced stock splits. However, the outlooks for these stock-split stocks differ meaningfully.
While AI juggernaut Nvidia (NVDA +5.93%) has shouldered the load in sending the major stock indexes to fresh record closing highs, it's my belief that two other stock-split stocks are positioned to absolutely crush Nvidia in the return column over the next three years.
The going is about to get considerably tougher for Nvidia
Nvidia's stock has risen by 765% between the start of 2023 and the closing bell on July 16, 2024, which translates into a gain of more than $2.7 trillion in market value. This outsized gain is what convinced the company's board to approve a historic 10-for-1 stock split on May 22.
On paper, everything has gone Nvidia's way. The company's H100 graphics processing unit (GPU) offers clear compute advantages over what few other AI-GPU options are available. As a result, Nvidia was responsible for roughly 98% of the 3.85 million AI-GPUs shipped last year, according to TechInsights.
NASDAQ: NVDA
Key Data Points
Furthermore, demand for Nvidia's chips has overwhelmed its supply. This allowed Nvidia to rapidly increase the selling price of its chips, which drove its adjusted gross margin to a scorching 78.35% during the fiscal first quarter (ended April 28).
Though things seem great on the surface, history, competition, and valuation are all headwinds that suggest Nvidia could struggle mightily in the coming years.
The headwind I continually return to with Nvidia and artificial intelligence is that there hasn't been a single buzzy innovation, technology, or trend for 30 years that's escaped an early innings bubble. Investors consistently overestimate the adoption rate and utility of next-big-thing innovations, and I don't see AI bucking this trend. If the AI bubble bursts, no company is going to take it on the chin more than Nvidia.
This is a company that can also be hurt by competition -- even if it maintains its GPU compute advantages. Stalwarts like Intel and Advanced Micro Devices are rolling out competing chips to the H100 in AI-accelerated data centers. Moreover, all four of Nvidia's top customers, which account for around 40% of its net sales, are developing in-house AI-GPUs. With demand swamping supply, Intel and AMD should have no trouble gaining market share in high-compute data centers. All the while, AI-GPU scarcity, and Nvidia's pricing power, will wane.
The final trouble spot is Nvidia's valuation. Although its forward price-to-earnings (P/E) ratio isn't off the charts, its trailing 12-month (TTM) price-to-sales (P/S) ratio is on par with the peak TTM P/S ratios seen from the likes of Cisco Systems and Amazon prior to the bursting of the dot-com bubble.
All signs point to Nvidia's stock struggling mightily over the next three years -- and the following two stock-split stocks leaving it in the dust.
Image source: Sirius XM.
Sirius XM Holdings
The first stock-split stock with the tools and intangibles needed to handily outperform Nvidia in the return column over the next three years is satellite radio operator Sirius XM Holdings (SIRI +0.00%).
Sirius XM is the only high-profile stock split of 2024 that's of the reverse-split variety. When Sirius XM completes its merger with Liberty Media's Sirius XM tracking stock, Liberty Sirius XM Group, during the third quarter, a 1-for-10 reverse split will be conducted.
What gives Sirius XM a high probability of outperforming Nvidia by the midpoint of 2027 is its abundance of competitive advantages.
To start with, it's the only licensed satellite radio operator. While it still competes for listeners with terrestrial and online radio providers, being the only licensed satellite radio operator gives it meaningful subscription pricing power.
More importantly, Sirius XM's operating model is markedly different than traditional radio providers'. Whereas online and terrestrial radio stations rely heavily on advertising to keep the lights on, Sirius XM brought in less than 19% of its $2.16 billion in first-quarter revenue from advertising (which traces back to its Pandora Media subsidiary). Advertising revenue can be prone to wild swings that are dependent on the health of the U.S. and global economy.
NASDAQ: SIRI
Key Data Points
Comparatively, Sirius XM generated almost 78% of its sales from subscriptions in the March-ended quarter. Subscribers are far less likely to cancel their service than advertisers are to pare back their spending during an economic downturn. In short, Sirius XM is better-positioned than its radio peers for whatever the U.S. economy throws its way.
There's also a level of cost transparency with Sirius XM that won't be found with other radio operators. No matter how many subscribers Sirius XM adds over time, its transmission and equipment costs aren't going to vary much, if at all.
Lastly, there's an undeniable value proposition with Sirius XM. Shares are valued at just 12 times forward-year earnings, which represents a 34% discount to its average forward-year earnings multiple over the trailing five-year period.
Sony Group
The other stock-split stock with all the necessary catalysts to absolutely crush Nvidia in the return department over the next three years is Japan-based consumer electronics powerhouse Sony Group (SONY +3.18%).
On May 14, the company's board announced plans to conduct a 5-for-1 forward-stock split. For the company's American Depositary Receipts (ADRs), the record date for this split is Sept. 30, with an effective date of Oct. 8. In other words, Sony's stock is still roughly two-and-a-half months away from becoming nominally cheaper.
Sony is probably best-known for its gaming prowess, even though sales of its flagship PlayStation 5 have tapered a bit since its release in late 2020, during the height of the COVID-19 pandemic. The good news is that its gaming segment has two catalysts to look forward to through 2027.
NYSE: SONY
Key Data Points
For starters, subscription revenue tied to PlayStation Plus has been climbing. PlayStation Plus is a multi-tiered service that gives subscribers the ability to game with their friends, and save their gaming data in the cloud. It's a high-margin service that's likely to keep subscribers loyal to the Sony brand.
To add to this point, Sony's next-generation console is liable to come to market sometime between late 2026 and early 2028. Since next-gen console sales have historically been a key revenue driver for Sony, it wouldn't be a surprise to see shares reacting positively well before the debut of a new console.
Beyond gaming, Sony Group is one of the top suppliers of image sensors used in smartphones. Wireless companies upgrading their networks to support 5G speeds have fueled a steady device replacement cycle that's lifted sales for the company's Imaging and Sensing Solutions (I&SS) segment. I&SS segment sales are forecast to grow by 15% this year.
Sony Group's board also believes the company's shares are trading at a discount. On the same day its 5-for-1 forward split was announced, the board approved the repurchase of up to 30 million outstanding shares (on a post-split basis). For businesses with steady or growing net income, stock buybacks have a way of lifting earnings per share and making fundamentally sound companies look even more attractive.
