It's a great time to be an optimist on Wall Street. For more than two years, the bulls have been in firm control, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all recently achieving record-closing highs.
A plethora of catalysts have helped fuel this rally, including the emergence of artificial intelligence (AI), Donald Trump's return to the White House, better-than-anticipated corporate earnings, and a decline in the prevailing rate of inflation from a four-decade peak of more than 9%. But it's important not to overlook the role stock splits have played in lifting the broader market.
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A stock split is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count by the same magnitude. Stock splits are "cosmetic" in the sense that they have no impact on a company's market cap or its underlying operating performance.
Splits come in two varieties, one of which is far more sought after by investors than the other. Reverse splits are the least-liked of the two and are designed to increase a company's share price. Reverse splits are often undertaken from a position of operating weakness and designed to keep a company's stock from being delisted due to a low nominal share price.
In comparison, investors usually gravitate to companies conducting forward splits. This type of split makes shares more nominally affordable for investors who can't purchase fractional shares through their broker. It's also the type of split undertaken by companies that have consistently out-innovated and out-executed their peers.
In 2024, more than a dozen high-profile stocks conducted a split, only one of which was of the reverse variety. Among these stock-split stocks, two stand out in February -- but for markedly different reasons.
The stock-split stock that can be bought hand over fist in February: Sony Group
On one end of the spectrum is a time-tested business that's still ripe for the picking by opportunistic long-term investors. I'm talking about Japan-based electronics juggernaut Sony Group (SONY +0.52%), which completed a 5-for-1 stock split in early October.
The reason Sony isn't getting a lot of attention from the investing community at the moment is simple: it's in the middle of a gaming console cycle. The PlayStation 5 (PS5) debuted during the early stages of the COVID-19 pandemic in November 2020, and the company's next-generation console isn't expected to hit retail shelves for two to three more years. While the absence of a new gaming console might have some investors overlooking Sony stock, multiple aspects of its operations suggest this is a mistake.
NYSE: SONY
Key Data Points
For example, the company has benefited from an uptick in PlayStation Plus sales. This is a high-margin, multitiered subscription service that allows users to access exclusive games, play with their friends, and save their data in the cloud. Additionally, Sony has been able to offset lower unit sales of its PS5 by increasing the price of its console 19% in its home market of Japan.
But what investors might not realize is that Sony Group is so much more than just the PS5 and games. The company's music segment has enjoyed a steady uptick in sales and profits due to more streaming opportunities and an increase in live events and merchandise sales in the wake of the pandemic.
Sony is also a key provider of image sensors used in smartphones. Wireless carriers upgrading their networks to support 5G download speeds have led to a steady smartphone replacement cycle that's increased sales of image sensors. Sony expects sales and profits for its Imaging and Sensing Solutions (I&SS) division to climb by 10% and 29%, respectively, in 2024.
Capital returns are another reason Sony Group is attractive for patient investors. The company's board has approved modest share repurchases, which can reduce the company's outstanding share count over time. For companies with steady or growing net income (i.e., Sony Group), a declining share count can lift earnings per share.
Finally, Sony's valuation makes sense amid a historically pricey stock market. The company's forward price-to-earnings (P/E) ratio of 18 remains attractive considering a next-gen console is eventually coming, and the company's gaming, music, and I&SS segments continue to outperform.
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The stock-split stock investors should avoid in February: MicroStrategy
On the other hand, investors would be wise to keep their distance from MicroStrategy (MSTR 4.46%) in February. MicroStrategy completed a 10-for-1 forward split following the close of trading on August 7.
Although MicroStrategy's foundational business for decades has been enterprise analytics software, the buzz that's sent its shares skyrocketing by nearly 1,300% over the trailing-two-year period is its ongoing acquisition of the world's largest cryptocurrency by market cap, Bitcoin (BTC +0.16%). In fact, MicroStrategy has officially shifted its operating strategy to become the world's first Bitcoin Treasury Company.
Based on an 8-K filed by the company with the Securities and Exchange Commission on Jan. 27, it held 471,107 Bitcoins. To put this into perspective, MicroStrategy owns 2.24% of the Bitcoin that will ever be mined (21 million). While MicroStrategy stock has decisively proved the naysayers wrong, a number of red flags suggest it's just a matter of time before this perceived bubble pops.
The most obvious issue with MicroStrategy is the inexplicable premium currently being assigned to the company's digital assets. As of this writing on Jan. 29, a single Bitcoin is worth $104,929. This means MicroStrategy's Bitcoin assets have a value of $49.43 billion. However, MicroStrategy's market cap ended Jan. 29 at $86.11 billion. Generously (and arbitrarily) assigning a $1 billion valuation to the company's struggling software operations yields a premium of 72% above net asset value for its Bitcoin assets. Instead of buying Bitcoin on an exchange for $104,929, investors buying MicroStrategy stock are paying close to $180,700 per token. This isn't a sustainable premium.
NASDAQ: MSTR
Key Data Points
Secondly, MicroStrategy is leveraging debt and its own common and preferred shares to continue to add to its Bitcoin hoard. On Jan. 27, the company announced plans to sell preferred stock with an 8% annual yield that'll be paid out by issuing shares of MicroStrategy common stock. Despite having the ability to issue close to 10 billion shares of common stock, management chose to issue preferred stock with a high yield that'll result in ongoing dilution to existing shareholders.
To add to this point, MicroStrategy's software operations are losing money and burning cash. Even though its interest payments aren't all that high, MicroStrategy's stagnant software segment isn't generating enough cash to service its debt.
Lastly, a bear market for Bitcoin -- declines of 50% to 80% have proved quite common every few years in the emotion-driven crypto landscape -- could easily undermine MicroStrategy's levered purchasing approach. History has shown that leverage-driven investment strategies often fail.
