Though Wall Street is firmly entrenched in a bull market right now, it’s been nothing short of a wild ride for investors since this decade began. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite were whipsawed between bear and bull markets in successive years from 2020 through 2023.
When uncertainty is a prevailing theme on Wall Street, it’s not uncommon for investors of all walks to seek out the safety of industry-leading businesses that have handily outperformed the major stock indexes. For years, this had involved investors flocking to the “FAANG stocks.” But over the last three years, it’s companies enacting stock splits that investors can’t stop buying.
Investors have gravitated to stocks conducting splits
A “stock split” allows a publicly traded company to cosmetically alter both its share price and outstanding share count by the same magnitude. I use the word “cosmetic” to make clear that stock splits have no effect on an underlying company’s market cap or operating performance.
Stock splits come in two varieties: forward and reverse. A forward-stock split is designed to make a company’s shares more nominally affordable for investors who might not be able to purchase fractional shares through their online broker. Meanwhile, a reverse-stock split aims to increase the share price of a publicly traded company to ensure its continued listing on a major stock exchange.
While there have been a handful of stocks throughout the years that have gone on to be wildly successful following a reverse split, most investors are rightly chasing after companies conducting forward-stock splits. Businesses enacting forward splits are often out-innovating their competition and have outperformed the benchmark S&P 500.
Since the midpoint of 2021, roughly a dozen high-profile companies have announced and/or completed a forward-stock split, including FAANG components Amazon and Alphabet. Through less than five months of 2024, four new juggernauts have joined this elite club.
Wall Street’s “Class of 2024” stock-split stocks
Stock-split announcements kicked off in late January when retail kingpin Walmart (NYSE: WMT) unveiled plans to conduct a 3-for-1 forward split. Although Walmart’s share price wasn’t absurdly high at the time (around $165), the company’s management team wanted to ensure that its associates would be able to purchase whole shares if they chose to participate in the Associate Stock Purchase Plan.
Walmart began trading at its split-adjusted price on February 26, which is also the day S&P Dow Jones Indices made a few changes to the iconic Dow Jones Industrial Average. Given Walmart’s ability to use its size to its advantage in order to undercut its competition on price, this is unlikely to be the company’s last stock split.
Next up was fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG), whose share price was near $3,000 when, in March, it announced its intent to conduct a 50-for-1 forward split in late June. Like Walmart, Chipotle’s management team wants to split its stock to make it more accessible to its team members.
Shares of Chipotle have skyrocketed more than 14,200% since its January 2006 initial public offering price of $22. In addition to providing fresher foods that consumers have clearly shown they’ll pay a premium for, Chipotle has benefited immensely by keeping its menu compact. A smaller menu helps its staff quickly prepare meals.
After Chipotle came Sony Group (NYSE: SONY). The Japan-based consumer electronics company announced a 5-for-1 stock split on May 14, with an effective date for the company’s American depositary receipts (ADRs) of October 8. This is Sony’s first stock split in 24 years.
Despite slower sales of Sony’s PlayStation 5 gaming console, which debuted in late 2020, the company has enjoyed solid sales growth from its PlayStation Plus subscription service, which allows gamers to save their data in the cloud and play multiplayer games with their friends. Sales of the company’s image sensors, which are used in next-generation smartphones, have been strong, too.
Now, Wall Street has a fourth stock-split stock of 2024, and it’s a familiar name: artificial intelligence (AI) kingpin Nvidia (NASDAQ: NVDA).
Say hello to Wall Street’s newest stock-split stock
Interestingly enough, Nvidia is one of the roughly “dozen high-profile companies” I alluded to earlier that have increased investors’ fascination with stock-split stocks since the midpoint of 2021.
Following the closing bell on May 22, Nvidia released its operating results for the fiscal first quarter (ended April 28) and announced a 10-for-1 forward split that’ll become effective before trading begins on June 10. This marks the sixth split since Nvidia became a public company, and its first since July 2021, when it completed a 4-for-1 split.
As has become the norm over the last 18 months, Nvidia mud-stomped Wall Street’s consensus sales and profit expectations for the April-ended quarter. Net sales more than tripled to $26 billion from the prior-year period, with Data Center revenue surging 427% from what was reported in the comparable quarter in fiscal 2024.
The catalyst for Nvidia is undeniably AI. The company’s A100 and H100 graphics processing units (GPUs) are what fuel the split-second decision-making needed in high-compute data centers handling generative AI solutions and training large language models. It’s been estimated that Nvidia’s chips account for around 90% of the GPUs deployed in AI-accelerated data centers.
Nvidia has also been a prime beneficiary of demand absolutely swamping supply. Even with top chip fabrication company Taiwan Semiconductor Manufacturing meaningfully increasing its chip-on-wafer-on-substrate (CoWoS) capacity — high-bandwidth memory is packaged on CoWoS and is a veritable necessity for AI-accelerated data centers — Nvidia is nowhere close to meeting AI-GPU demand. As a result, it’s enjoyed otherworldly pricing power for its chips and increased its gross margin to north of 78%.
Based solely on Nvidia’s operating results over the last year and change, the company appears unstoppable.
But looks can be deceiving.
History is going to catch up with Nvidia sooner than later
While it’s difficult to find a flaw in Nvidia’s fiscal first-quarter operating results, the company’s guidance and history provide clues that suggest this stock-split stock could be knocked off of its pedestal sooner than later.
One of the more glaring concerns for Nvidia is how next-big-thing innovation trends have fared over the last three decades.
Beginning with the advent of the internet, every next-big-thing innovation has navigated its way through an early innings bubble precipitated by lofty investor expectations. In simpler terms, investors have a terrible habit of overestimating how quickly a new technology, innovation, or trend will be adopted. History suggests it’s highly unlikely for artificial intelligence to be the exception to this unwritten rule. While Nvidia’s GPUs can still be wildly successful over the long run, the company’s stock maintaining its nearly parabolic move higher probably isn’t in the cards.
Nvidia’s fiscal second-quarter guidance also raised a red flag that likely flew over the heads of most investors. During the first quarter, Nvidia’s gross margin (net sales less cost of revenue) tipped the scales at 78.4%. But for the second quarter, Nvidia is forecasting an adjusted gross margin of 75.5%, give or take 50 basis points.
This forecast retracement in gross margin of close to three percentage points is likely the result of two factors. First, Nvidia is starting to contend with its first real bout of external competition. Advanced Micro Devices and Intel are both rolling out their respective H100 GPU rivals. Even if Nvidia’s chips are preferred in data centers, the mere presence of these external competitors will lessen AI-GPU scarcity and almost certainly weaken Nvidia’s pricing power.
The other probable issue is competition from within. Nvidia’s top customers include Microsoft, Meta Platforms, Amazon, and Alphabet. Together, these four companies account for about 40% of its net sales. The problem is that all four are developing AI-GPUs of their own for their data centers. More than likely, this is the peak quarter for Nvidia’s gross margin.
While stock-split stocks are expected to remain all the rage on Wall Street, they’re not all worth investing in.
Should you invest $1,000 in Nvidia right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Sean Williams has positions in Alphabet, Amazon, Intel, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Chipotle Mexican Grill, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Walmart. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Meet Wall Street’s Newest Stock-Split Stock — a Company on the Cutting Edge of the Hottest Innovation was originally published by The Motley Fool
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