With the exception of artificial intelligence (AI), there's not a hotter trend on Wall Street right now than companies conducting stock splits.
A stock split is an event where a publicly traded company cosmetically alters its share price and outstanding share count by the same magnitude. It's "cosmetic" in the sense that changing a company's share price and share count by the same factor has no effect on its market cap or operating performance.
Image source: Getty Images.
There are two types of stock splits: forward and reverse. With a forward-stock split, companies are angling to make their shares more nominally affordable for retail investors who might not have access to fractional-share purchases with their broker. Meanwhile, a reverse-stock split aims to increase a company's share price, often with the goal of ensuring it meets the minimum continued listing standards on a major stock exchange.
Most investors tend to favor forward-stock splits, because the companies enacting forward splits are typically out-innovating and out-executing their peers.
Since 2024 began, nine high-profile stocks have announced or completed a stock split. However, not all of these stock-split stocks share the same outlook. As we motor into the second half of 2024, one of these stock-split stocks stands out as a phenomenal deal for patient investors, while two others are worth avoiding.
Stock-split stock No. 1 that's worth avoiding in the second half of 2024: Nvidia
In spite of its undeniable popularity, AI juggernaut Nvidia (NVDA +0.64%) is the first stock-split I'd suggest investors purposefully avoid for the final six months of 2024. Nvidia announced a 10-for-1 forward split on May 22, which was completed on June 7.
NASDAQ: NVDA
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Although I'm no fan of Nvidia from an investment perspective, I'm happy to give the company credit where it's due. Nvidia's AI-graphics processing units (GPUs) have set the standard in high-compute data centers. According to semiconductor analysis firm TechInsights, it was responsible for 98% of the 3.85 million AI-GPUs that were shipped last year. Having first-mover and compute advantages over its peers has given the company substantial pricing power.
But this is where the praise ends and history works its way back into the discussion.
Since the advent of the internet in the mid-1990s, there hasn't been a buzzy innovation, technology, or trend that avoided an early stage euphoria-bursting event. This is to say that investors have overestimated the adoption and/or utility of every next-big-thing innovation or technology for 30 years (including the internet itself). While this doesn't mean artificial intelligence and Nvidia can't be wildly successful over the long run, the simple fact that most businesses lack a concrete plan for AI suggests a bubble is brewing.
To add to this point, Nvidia's trailing-12-month price-to-sales (P/S) ratio is strikingly similar to the P/S ratio peaks we witnessed from Cisco Systems and Amazon prior to the dot-com bubble bursting. History may not precisely repeat on Wall Street, but it does have a tendency to rhyme.
We're also starting to see evidence that competition will weigh on Nvidia's monopoly like market share in AI-accelerated data centers. Even if the company's GPUs were to maintain their compute advantages, new competitors can benefit from demand overwhelming supply -- and Nvidia can't meet all of its enterprise demand.
Furthermore, Nvidia's four-largest customers by net sales are internally developing their own AI-GPUs. Even if these chips are used as a complement to Nvidia's H100 GPU, it signals the intent by America's most-influential businesses to reduce their reliance on Nvidia's hardware.
NYSE: CMG
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Stock-split stock No. 2 to keep your distance from in the latter half of 2024: Chipotle Mexican Grill
The second stock-split stock that investors would be wise to avoid in the second half of 2024 is none other than the hottest fast-casual restaurant chain on Wall Street, Chipotle Mexican Grill (CMG 2.72%). Chipotle's board announced the company's first-ever stock split (a 50-for-1 forward split) on March 19, with its share adjustment occurring after the closing bell on June 25.
Similar to Nvidia, I can recognize that Chipotle and its management team have done a lot right, even if I'm not currently a fan from an investment standpoint. Chipotle shares have rallied more than 14,800% since its initial public offering price of $22 in January 2006 due to a combination of simplicity and innovation.
Chipotle has kept things simple by sourcing its vegetables locally (when possible), using responsibly raised meats, prepping its food daily, and avoiding a bulky menu. The result is a well-oiled machine that quickly prepares meals and keeps lines in its stores moving.
But there's only so much innovation that can be squeezed out of a fast-casual restaurant chain. While the introduction of mobile order-dedicated drive-thru lanes ("Chipotlanes") has helped the company immensely, Chipotle's same-store sales grew by only 7% during the first quarter. Though 7% same-store sales growth would be phenomenal for most businesses, it's a genuine eyesore for a company valued at roughly 50 times forward-year earnings.
I'll also add that 1.6% of the 7% organic growth rate in existing stores came from an "increase in average check." While it's always good news when a company enjoys strong pricing power, nearly a quarter of Chipotle's organic sales growth is simply due to inflation.
Considering that there are still predictive indicators that suggest a U.S. economic downturn is on the horizon -- e.g., the historic decline in U.S. M2 money supply -- companies with premium valuations in traditionally slower-growing industries, like Chipotle, are the likeliest to get thumped if a recession does materialize.
Image source: Getty Images.
The stock-split stock you can confidently buy for the second half of 2024: Sirius XM Holdings
Out of the nine high-profile companies to have announced a stock split in 2024, eight are conducting forward splits. However, the best value of the group is the only top-tier company slated to complete a reverse-stock split: satellite-radio provider Sirius XM Holdings (SIRI +0.00%).
In a June 17 filing with the Securities and Exchange Commission, Sirius XM announced its intent to conduct a 1-for-10 reverse split upon completing its merger with Liberty Media's Sirius XM tracking stock, Liberty Sirius XM Group. This combination and share consolidation, which'll create a single outstanding share base, is expected to close during the third quarter.
Although reverse-stock splits are usually undertaken by companies on the decline, Sirius XM's operating performance has pointed to steady growth over the long haul.
NASDAQ: SIRI
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One of the keys to Sirius XM's success is its revenue diversity. Terrestrial and online radio providers generate most of their sales from advertising. The thing about advertising is that it's highly cyclical and prone to fluctuations. Sirius XM brought in less than 19% of its first-quarter sales from ads (via Pandora).
By comparison, Sirius XM generated close to 78% of its sales in the March-ended quarter from subscriptions. Subscribers to its satellite-radio services are far less likely to cancel than businesses are to reduce their ad spending during periods of economic turbulence. Couple this with the fact that Sirius XM is the only licensed satellite-radio operator -- ergo, it has exceptionally strong pricing power -- and you have a recipe for steady operating cash flow in virtually any economic climate.
Additionally, Sirius XM enjoys better cost transparency than most radio operators. Whereas content and royalty costs are going to ebb-and-flow from quarter to quarter, transmission and equipment expenses aren't going to change much, if at all, regardless of how many subscribers the company adds.
At no point in Sirius XM's 30 years as a publicly traded company has it been cheaper than it is now. Shares can be scooped up by opportunistic investors for just 8 times forward-year earnings, which represents a 55% discount to its average forward-year earnings multiple over the last five years.
