Volatility and uncertainty are something every investor has to contend with. Even though we're in a rip-roaring bull market right now, this decade began with all three major stock indexes trading off bear and bull markets in successive years (through 2023).
For the longest time, when the going got tough on Wall Street, investors would seek out the safety of the FAANG stocks. But over the last three years, it's stocks enacting splits that have been investors' security blanket.
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A stock split is a mechanism that allows a publicly traded company to alter its share price and outstanding share count without affecting its market cap or operating performance. Stock splits come in two forms: forward and reverse.
With a forward-stock split, a company intends to reduce its share price to make its stock more nominally affordable for everyday investors who might not be able to purchase fractional shares with their broker. Companies sometimes also enact forward splits to encourage their employees to participate in an employee stock purchase plan.
Meanwhile, a reverse-stock split has the goal of increasing a company's share price to ensure it meets the continued minimum listing standards on a stock exchange.
For all intents and purposes, investors have gravitated to high-flying stocks enacting forward splits. Since this year began, eight high-profile businesses with well-defined competitive advantages have announced and/or completed stock splits.
However, the outlooks for these eight stock-split stocks vary quite a bit. While two of these stock-split stocks can be confidently purchased by patient investors, another could be setting its shareholders up for disappointment.
Stock-split stock No. 1 that can be confidently bought right now: Broadcom
Among the Class of 2024 stock-split stocks, none appears to have a brighter future than semiconductor solutions giant Broadcom (AVGO 0.71%). Broadcom's board approved a 10-for-1 stock split (the first in the company's history) on June 12, with an effective date of July 15.
There's absolutely no question that artificial intelligence (AI) has been fueling the rampage higher in shares of Broadcom. The company decisively entered the AI-accelerated data center space last year when it introduced its Jericho3 chip, which is tasked with connecting up to 32,000 high-compute graphics processing units (GPUs) in AI-accelerated data centers. Broadcom's networking solutions are reducing tail latency and expediting the computation and decision-making that's necessary for AI-driven software and systems.
Although there's a viable case to be made that AI will eventually succumb to a bubble-bursting event in the same manner every other next-big-thing innovation has over the last three decades, Broadcom's secret sauce is that it does far more than just develop AI-based solutions.
For instance, a substantial portion of its sales and operating cash flow comes from selling wireless chips and accessories found in smartphones. Wireless providers upgrading their networks to support 5G speeds, and steadily expanding their 5G coverage to businesses and residential consumers around the country, has led to an ongoing device replacement cycle that's fueling demand for Broadcom's next-gen wireless solutions.
Broadcom has an assortment of products and solutions beyond smartphones, as well. It provides sensors used in automated industrial equipment, develops vehicle connectivity solutions, and offers financial software and cybersecurity solutions, along with a host of other products and services that go well beyond smartphones and high-compute data centers.
Broadcom is ideally positioned to navigate an AI bubble, should one occur. Although its forward price-to-earnings ratio of 29 isn't cheap in the traditional sense, Broadcom's ability to generate annualized earnings growth of around 20% makes this valuation far more palatable for long-term investors.
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Stock-split stock No. 2 that can be scooped up with confidence right now: Sony Group
The other magnificent stock-split stock of 2024 that can be confidently gobbled up by investors right now is Japan-based consumer electronics titan Sony Group (SONY 0.95%). Sony's board announced plans to conduct a 5-for-1 forward split on May 14, with an effective date for the company's American Depositary Receipts (ADRs) of October 8.
It's no secret that the gaming industry is cyclical. The PlayStation 5 gaming console has been on retail shelves for more than three years, leading to sales tapering a bit. The good news for Sony is that it has other catalysts capable of pushing its valuation and profits higher until the next-generation console makes its debut (likely in 2027).
For instance, even though console sales are unimpressive, PlayStation Plus subscription revenue has been climbing. PlayStation Plus is the company's service that allows subscribers to save their game data in the cloud, as well as play games with friends. Subscription revenue is recurring, high-margin, and tends to generate substantially better margins than hardware sales, such as consoles. Think of this as the perfect razor (console)-and-blades (PlayStation Plus) setup.
In addition to improved subscription gaming revenue, Sony is one of the key producers of image sensors used in next-generation smartphones. Just as Broadcom's wireless chips are benefiting from the ongoing device replacement cycle, Sony is enjoying a hearty uptick in sales for its Imaging and Sensing Solutions segment.
Sony Group is also the cheapest stock-split stock among the eight top-notch businesses to announce a split in 2024. Shares of the company can be scooped up for less than 15 times forward-year earnings.
The icing on the cake is that Sony Group's board authorized a share repurchase program in addition to its split. If fully executed, close to 2.5% of all outstanding shares can be repurchased, which should have a modestly positive impact on earnings per share, and make this stock even more fundamentally attractive to value-focused investors.
The stock-split stock that's worth avoiding: Nvidia
On the other end of the spectrum, the hottest AI stock on the planet, and arguably the most-anticipated stock-split company of 2024, Nvidia (NVDA 0.25%), is the highflier to avoid. Nvidia announced a 10-for-1 forward split on May 22 -- it's second split since July 2021 -- which became effective following the close of business on June 7.
On paper, Nvidia has done everything expected of it by Wall Street (and some). The company's AI-GPUs have sold like hotcakes, with Nvidia unable to meet all of the orders it's received. Supply demonstrably overwhelming demand has allowed the company to increase the selling price of its H100 GPU and pump up its adjusted gross margin to a hearty 78.4%, as of the end of the fiscal first quarter (ended April 28).
But even the best companies in the world have headwinds to contend with, and Nvidia's are mounting.
Throughout 2024, external competition in AI-accelerated data centers will be picking up. Intel and Advanced Micro Devices are rolling out their direct competitors to Nvidia's H100 GPU. What Wall Street and investors may be overlooking is that even if Nvidia's GPUs retain a compute advantage, the company's inability to meet enterprise demand opens the door for these newer entrants to win share.
Furthermore, Nvidia is bound to face competitive pressures from within its own customer base. Its four largest customers, which account for approximately 40% of its net sales, are all internally developing AI-GPUs for their data centers. Once again, even if Nvidia's chips remain far superior in many respects, the mere presence of these other chips reduces the AI-GPU scarcity that's fueled its pricing power. Translation: It's bad news moving forward for Nvidia's adjusted gross margin.
The final piece of the puzzle, which I alluded to earlier, is that every highly touted trend or buzzy technology or innovation that's come along over the last 30 years has met the same fate. Investors consistently overestimate how quickly a new innovation or technology will attain mainstream adoption, which leads to a bubble. AI seems unlikely to break this historic trend, which bodes poorly for Nvidia.
