The past few months have seen a bunch of artificial intelligence (AI)-related technology companies announce stock splits. In fact, of the five potential AI stock splits I wrote about back in May, four have already either executed or announced imminent splits.
Remember, a stock split doesn’t change the intrinsic value of a stock one iota. But it can open up the stock to more retail investors and/or employees who would like to buy shares in lower dollar amounts, and who don’t have access to fractional share buying.
With stock-split fever in the air and the Nasdaq recovering from its late-July slump, even more AI-related stocks are seeing their share prices soar. With a high share price and the likelihood of more AI-fueled growth ahead, these three are the next candidates to split their stock in the near to medium term.
Meta Platforms
One might not think of Meta Platforms (NASDAQ: META) as an AI leader, but don’t underestimate CEO Mark Zuckerberg and his management team: Meta actually has the potential to beat current market leaders such as OpenAI and others at their own game.
Meta obviously has the financial resources to invest in leading AI infrastructure, but its competitive advantage may be in Zuckerberg’s decision to open-source the company’s Llama model code. Open source essentially means giving away the code for free, but that allows outside developers to optimize and make improvements to the underlying model. That decision has the potential to increase Llama’s innovation faster than closed-source competitors like OpenAI or the models coming from other “Magnificent Seven” stocks.
Meta can afford to do this because selling direct access to its AI large language model isn’t its core business. Rather, its core social media platforms all benefit from the increased potency of AI, which has shown the ability to increase user engagement and better target ads, which leads to more revenue per ad.
That was on display in the second quarter. Despite Meta’s already enormous size, the company was able to grow daily active people by 7%, while increasing revenue by 22% and operating income by a whopping 58%.
Of course, one day, Llama should become a revenue generator, as Zuckerberg has identified potential future use cases, such as agents automating a lot of tasks for creators, inserting ads into AI interactions, or potentially directly charging for higher, more advanced levels of AI modeling and compute. But for now, Meta can afford to take its time and develop those services.
Meta is currently the only Magnificent Seven stock to have never split its stock. But with its share price already north of $525 per share and a very reasonable valuation at 26 times earnings, it’s not far-fetched that a stock split may be in the near future. After all, this year has already seen another first for Meta, as the company initiated a dividend for the first time back in February.
KLA Corporation
KLA Corporation (NASDAQ: KLAC) has seen its stock surge in anticipation of an artificial intelligence investment boom. As the dominant player in process control equipment, which helps chipmakers check chip wafers for defects at multiple steps of the chipmaking process, KLA seems set for growth as leading-edge AI chips and memory become more and more complex.
KLA has a dominant market share in the metrology and inspection end market, with its share as high as 55% in some verticals. That market dominance of a crucial semiconductor process enables high margins and free cash flow, with the company’s operating margin coming in at a whopping 41% last quarter.
KLA’s killer combination of growth and profitability is the reason it has raised its dividend at a 15% annualized rate since 2006. And it’s also why the stock price has surged to $820 per share, making it ripe for a stock split.
Semiconductor capital equipment peer Lam Research announced it would be splitting its stock back in May, to take effect in October, and its shares trade around the same price as KLA’s today. Like KLA, Lam dominates a certain part of the chipmaking process, but a different step in etch and deposition. So, these two aren’t really competitors, but they have similar high profit margins due to a lack of competition. Given their similar characteristics and the chip industry seemingly on the brink of an upturn, it’s not unthinkable KLA Corporation may announce a split sometime soon.
Arista Networks
At $350 per share, Arista Networks (NYSE: ANET) may not undergo a 10-for-1 stock split like some of its tech peers have recently done, but it could split 2 or 3 for 1.
Arista was a disruptive company at the advent of the cloud computing age. Its new-age networking switch architecture fashioned data center switches out of best-of-breed merchant third-party hardware, lowering internal costs. Arista’s EOS software is what ties it all together, enabling high performance, system intelligence, and lightning-fast speeds at lower costs than traditional switches.
Arista’s software focus and huge scale affords it very high margins. Last quarter, Arista’s revenue grew 15.9%, and its operating margin reached over 41% over the past 12 months, with an admirable return on equity of 34.5%. Those are top-tier levels of profitability and solid growth.
Artificial intelligence needs efficient switching and routing as traditional data centers do, but on a bigger and more complex scale. So Arista is a natural beneficiary of the theme. But earlier this year, some may have grown concerned that in-house networking solutions from Nvidia, based on Infiniband technology, might become a competitive threat.
But Ethernet-based Arista seems to have put that to bed with recent results. In fact, Arista even unveiled a new holistic AI data center solution in collaboration with Nvidia on its recent earnings release, showing that the leading AI chipmaker still values collaboration with Arista and its leading ethernet-based solutions.
Look for Arista to continue to innovate its EOS software and switching architecture for super-large AI clusters. With a bright future, expect Arista to continue riding the AI wave higher, and for a potential eventual stock split.
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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. Billy Duberstein and/or his clients have positions in KLA, Lam Research, and Meta Platforms. The Motley Fool has positions in and recommends Arista Networks, Lam Research, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
Stock-Split Watch: 3 Artificial Intelligence (AI) Stocks That Look Ready to Split was originally published by The Motley Fool
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