Although anything having to do with artificial intelligence (AI) has been garnering Wall Street's attention for more than a year, a strong case can be made that the trend investors can't get enough of right now is companies enacting stock splits.
A stock split is a mechanism that allows a publicly traded company to cosmetically alter its share price and outstanding share count by the same factor. It's superficial in the sense that stock splits won't change a company's market cap or in any way impact its operating performance.
Stock splits come in two forms, one of which has a considerably better track record of making long-term investors richer. Reverse-stock splits are designed to increase a company's share price, usually with the purpose of ensuring it remains listed on a major stock exchange.
Meanwhile, forward-stock splits reduce a company's share price to make it more nominally affordable for investors who might not have access to fractional-share purchases with their broker. Since forward splits are executed in a position of strength, often by companies that are out-innovating their peers, they're what investors tend to gravitate toward.
Since 2024 began, one dozen exceptional businesses have announced and/or completed stock-splits (asterisk denotes a completed split):
Walmart (NYSE: WMT): 3-for-1*
Nvidia (NASDAQ: NVDA): 10-for-1*
Amphenol (NYSE: APH): 2-for-1*
Chipotle Mexican Grill (NYSE: CMG): 50-for-1*
Mitsui (OTC: MITSY)(OTC: MITSF): 2-for-1*
Williams-Sonoma (NYSE: WSM): 2-for-1*
Broadcom (NASDAQ: AVGO): 10-for-1*
MicroStrategy (NASDAQ: MSTR): 10-for-1
Cintas (NASDAQ: CTAS): 4-for-1
Sirius XM Holdings (NASDAQ: SIRI): 1-for-10
Lam Research (NASDAQ: LRCX): 10-for-1
Sony Group (NYSE: SONY): 5-for-1
Among these time-tested businesses is one phenomenal stock-split stock that's begging to be bought in August, as well as two ultra-popular stock-split stocks that can be avoided like the plague.
Working backwards, the first stock-split stock that can be easily avoided in August (and likely beyond) is AI colossus Nvidia. Nvidia's historic 10-for-1 split was completed following the close of trading on June 7.
This is unlikely to be a popular opinion considering how dominant Nvidia's hardware has become in AI-accelerated data centers. Semiconductor analysis firm TechInsights pegged Nvidia's share of graphics processing units (GPUs) shipped for data centers in 2023 at a whopping 98%! With continued innovation -- e.g., the rollout of the Blackwell platform later this year and the expected debut of the Rubin GPU architecture in 2026 -- Nvidia's GPUs shouldn't have a problem maintaining their compute advantage.
But as I've recently argued, compute advantage isn't everything when it comes to AI-accelerated data centers.
Beginning this year, Nvidia is contending with competition for valuable "real estate" in high-compute data centers. Advanced Micro Devices and Intel are both rolling out and/or increasing production of their respective AI-GPUs in the second-half of 2024.
What's more, Nvidia's four largest customers by net sales (all members of the "Magnificent Seven") are developing AI chips for their respective data centers. This signals a clear desire by these leading customers to reduce their reliance on Nvidia's hardware moving forward. Even with compute advantages, the available "real estate" for Nvidia's chips in data centers is set to diminish.
History isn't Nvidia's friend, either. Including the advent of the internet roughly 30 years ago, there hasn't been a game-changing innovation, technology, or trend for three decades that avoided an early stage bubble-bursting event. In simpler terms, investors have a tendency to overestimate the uptake and utility of new technologies. With most businesses lacking a rock-solid plan for their AI investments, it's looking as if artificial intelligence is the next in a long line of next-big-thing bubbles.
Lastly, Nvidia's trailing-12-month price-to-sales ratio is more or less on par with where market leaders Cisco Systems and Amazon peaked prior to the dot-com bubble collapsing. History may not repeat to a "t," but it does have a tendency to rhyme on Wall Street.
Stock-split stock No. 2 that's worth avoiding in August: MicroStrategy
A second stock-split stock that's rife with red flags and should be absolutely avoided by investors in August (and well beyond) is AI-driven enterprise analytics software company MicroStrategy. MicroStrategy's 10-for-1 forward split will take effect after the close of trading on August 7.
Although it's, technically, a software company, MicroStrategy's claim to fame is that it's the largest corporate holder of Bitcoin (CRYPTO: BTC), the world's leading cryptocurrency by market value. As of June 20, MicroStrategy held 226,331 Bitcoins, which is more than 1% of the 21 million tokens that'll ever be mined.
While it's generally easier to buy shares of MicroStrategy through your broker than it is to purchase Bitcoin on a cryptocurrency exchange, there are a number of drawbacks to this strategy.
The single biggest problem with betting on upside in MicroStrategy stock is that investors are grossly overvaluing its Bitcoin assets. At the time of this writing, a single Bitcoin costs $67,888, which values MicroStrategy's Bitcoin portfolio at nearly $15.4 billion. However, MicroStrategy's market cap is a lofty $31 billion, which suggests that investors are valuing its Bitcoin assets between $29 billion and $30 billion. Why would you pay $130,000 per Bitcoin token when you can buy it on an exchange for less than $68,000?
Another problem for MicroStrategy is that it's been financing its Bitcoin purchases with convertible-debt offerings. Bitcoin is known for its steep bear markets, which feature losses of greater than 80%. If the world's largest cryptocurrency goes into hibernation, once again, there's no guarantee MicroStrategy will be able to cover its debt obligations.
I'll also add that Bitcoin's first-mover advantages aren't what they once were. Other blockchain projects offer faster payments at a considerably lower cost. It's effectively a first-generation network that's been outdone by multiple third-generation projects.
To round things out, MicroStrategy's enterprise analytics software segment has seen sales decline by 14% over the last decade.
The phenomenal stock-split stock to buy hand over fist in August: Sirius XM Holdings
On the other side of the coin is the cheapest stock-split stock of the dozen that's begging to be bought in August. I'm talking about the only high-profile company set to conduct a reverse-stock split in September (1-for-10) -- satellite-radio operator Sirius XM Holdings.
Like every publicly traded company, Sirius XM is working its way through various challenges. The biggest concern at the moment is an expected weakening of auto sales in the second half of this year. Sirius XM counts on promotional users (via new vehicle purchases) becoming self-pay subscribers. If the U.S. economy weakens or consumers show reduced interest in new vehicles, Sirius XM can expect self-pay subscribers to slow or decline.
On the bright side, Sirius XM has history in its corner. Although economic downturns are normal and unavoidable, they're most-importantly short-lived. Only three of the 12 U.S. recessions since the end of World War II reached the 12-month mark. Long-winded expansions tend to favor the entertainment industry, including radio operators.
But what makes Sirius XM such an intriguing investment is its differences from traditional radio companies. Whereas terrestrial and online radio operators generate almost all of their revenue from advertising, Sirius XM brought in less than 19% of its first-quarter sales from ads (via Pandora). Rather, it generated close to 78% of its revenue from subscriptions.
When economic downturns do arise, or the winds of change begin to blow, it's not uncommon for businesses to reduce their ad spending. But it's far less common for subscribers to cancel their service with Sirius XM. In other words, Sirius XM's operating cash flow will fluctuate far less than its peers during periods of economic turbulence.
To add to this point, it's the only licensed satellite-radio operator. Being a legal monopoly affords Sirius XM strong pricing power, which it can use to stay ahead of the inflationary curve.
The final piece of the puzzle is Sirius XM's historically cheap valuation. Even with the stock market at one of its priciest valuations spanning 153 years, shares of Sirius XM can be scooped up for less than 12 times forward-year earnings. The cherry on the sundae is that you'll also generate a 2.9% annual yield for your patience.
Should you invest $1,000 in Nvidia right now?
Before you buy stock in Nvidia, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $635,614!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 29, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon, Intel, and Sirius XM. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Bitcoin, Chipotle Mexican Grill, Cisco Systems, Lam Research, Nvidia, Walmart, and Williams-Sonoma. The Motley Fool recommends Broadcom, Cintas, and Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
1 Phenomenal Stock-Split Stock to Buy Hand Over Fist in August, and 2 to Absolutely Avoid was originally published by The Motley Fool