Stock splits are all the rage this summer with several high-profile companies choosing to execute the move. Nvidia probably attracted the most attention as it was the hottest stock on the market well before its split, but other big names like Chipotle and Broadcom joined in on the fun.
Why? Stock splits, in this case forward stock splits, happen when a company's share price gets to a level that makes it difficult for a significant portion of the market to buy in. In other words, it's too expensive for the average Joe. The company issues stockholders more stock and proportionally reduces the price at which each share trades.
So in the end, you have more shares, but the total value of all your investments hasn't changed because the shares cost less. However, even though the value in theory doesn't change, more often than not a forward split is followed by positive movement in the stock price. They tend to be good news for investors.
So who might be next? Well, it's impossible to know for sure, but there's one artificial intelligence (AI) company that I think could split its stock sooner rather than later.
Meta is riding high on huge earnings after delivering big time
A far cry from its beginnings as "The Facebook," Meta Platforms (NASDAQ: META) evolved dramatically over the years into the global social media powerhouse it is today. With 3.27 billion daily active users, Meta is ingrained in the lives of a significant portion of the world.
The company just released monster earnings for Q2 2024, beating Wall Street's already healthy expectations. The company posted 22% year-over-year growth in revenue and a whopping 73% jump in earnings per share.
Lots of different factors went into it. The company is much leaner these days, following layoffs in the last year that reduced the headcount and overhead. Revenue growth, though, comes from the continued growth of Meta's user base and the frequency and price of its ads. Meta's entire bottom line is driven by advertising, at least at this point. CEO Mark Zuckerberg is continuing to double down on his metaverse play -- we'll see how that plays out. The company served 10% more ads while charging 10% more for the service.
Advertisers love Meta's apps because people who use them are extremely engaged. Furthermore, Meta began incorporating AI into its algorithms, serving ads in an even more effective manner and serving more targeted content to users who keep them using the apps.
Meta's stock looks ripe for a split
When the earnings were released, the company's stock jumped nearly 5% the next day and another 8% since. Now around $530 a share, it is the most expensive stock by price in the "Magnificent Seven." It is also the only one that has yet to split its stock.
There is no set price at which companies decide to pull the trigger. Nvidia's stock was trading around $1,200 when it split; Alphabet's was trading around $2,700. Some companies do it at a much lower price, though. The last time Apple split its stock it was trading just shy of $500. Meta's current $530 is more than enough to justify a split and considering the move's popularity as of late, I think there is a solid chance it could happen in the near future.
Stock splits are not a reason to buy a stock, however. Meta's fundamentals make it a stock that you should have in your portfolio. It is delivering where it needs to consistently while investing money into the future. And even if Zuckerberg's vision for the metaverse doesn't pan out, the company is still in a strong position to succeed.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Chipotle Mexican Grill, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is This Unstoppable AI Stock The Next Big Stock Split? was originally published by The Motley Fool