Smart investors pay attention to stock splits because they are often an indirect indicator of quality businesses. To elaborate, forward stock splits are only necessary after substantial and sustained share price appreciation, and that rarely happens to mediocre businesses.
Not surprisingly, stocks that split tend to beat the S&P 500 (^GSPC +0.58%), at least temporarily, according to Bank of America. Since 1980, stocks have generated an average return of 25% during the one-year period following a stock split announcement, while the S&P 500 returned 12% during the same period.
This year, Walmart (WMT +0.86%) announced a 3-for-1 stock split on Jan. 30, and completed the split after market close on Feb. 23. Shares have surged 35% since the announcement, but Simeon Gutman at Morgan Stanley has set a bull-case target of $109 per share. That forecast implies 47% upside from its current share price of $74.
Similarly, Nvidia (NVDA +2.33%) announced a 10-for-1 stock split on May 22, and completed the split after market close on June 7. Shares have surged 34% since the announcement, but Rosenblatt analyst Hans Mosesmann has set a target of $200 per share. That forecast implies 57% upside from its current share price of $127.
Here's what investors should know about Walmart and Nvidia.
NASDAQ: WMT
Key Data Points
1. Walmart
Walmart is the largest retailer in the world and the second-largest e-commerce business in the United States. That scale affords the company an important cost advantage. It can buy inventory from suppliers in bulk and pass savings to consumers. In turn, Walmart can sell a wide assortment of products at low prices, including perishable groceries that online retailers typically lack.
The promise of bargain prices across a broad range of goods brings consumers to Walmart more frequently than any other superstore. The company accounted for 62% of superstore visits during the first four months of 2024, according to Placer.ai. That consistent foot traffic reinforces the ubiquity of the Walmart brand, keeping the company top of mind for consumers.
Walmart reported encouraging financial results in the second quarter. Revenue increased 4.8% to $169 billion on particularly strong sales growth in e-commerce, membership fees, and advertising. Meanwhile, gross profit margin expanded 43 basis points because of pricing power, lower delivery costs per order, and a sales mix shift toward more profitable products like advertising services. In turn, non-GAAP net income increased 10% to $0.67 per diluted share.
CEO Doug McMillon said, "Each part of our business is growing -- store and club sales are up, e-commerce is compounding as we layer on pickup and even faster growth in delivery as our speed improves." He also said new businesses like advertising, memberships, and the online marketplace for third-party merchants are "diversifying profits and reinforcing the resilience of our business model."
Going forward, Wall Street expects adjusted earnings to grow at 10% annually through fiscal 2027 (ends January 2027). That consensus estimate makes the current valuation of 31 times earnings look expensive, which makes the 47% return implied by Morgan Stanley's bull-case price target seem unlikely. Personally, I would keep Walmart on my watchlist until shares look a little cheaper.
NASDAQ: NVDA
Key Data Points
2. Nvidia
Nvidia accounted for 98% of data center graphics processing unit (GPU) shipments last year, and its market share was similar in the previous year. GPUs can perform technical calculations more quickly and efficiently than central processing units (CPUs), which makes them good at accelerating demanding workloads like rendering 3D graphics, training machine learning models, and running artificial intelligence (AI) applications.
Nvidia's long-standing dominance in data center GPUs means the company was perfectly positioned to benefit when ChatGPT launched in 2022, eliciting an exponential increase in demand for AI infrastructure. Nvidia holds over 80% market share in AI chips, and Forrester Research recently wrote, "Nvidia sets the pace for AI infrastructure worldwide. Without Nvidia GPUs, modern AI wouldn't be possible."
Nvidia reported first-quarter financial results that beat expectations on the top and bottom lines. Revenue surged 262% to $26 billion on momentum in the data center segment. That was fueled by "strong and accelerating demand for generative AI training and inference on the Hopper platform," according to CEO Jensen Huang. Meanwhile, non-GAAP net income jump 461% to $6.12 per diluted share.
Investors should know that shipments of Nvidia Blackwell GPUs -- chips that offer faster training and inference speeds than the previous Hopper architecture -- will be delayed by three months. Technology-focused news company The Information broke the story earlier this month, citing design flaws discovered "unusually late in the production process" as the reason for the delay.
Management will likely address the issue when the company announces second-quarter financial results on Aug. 28. The stock could move sharply in either direction depending on the context, so shareholders should be ready. That said, the long-term investment thesis remains intact. Nvidia GPUs are the industry standard in AI computing, and the graphics processor market is forecasted to grow at 28% annually through 2030, according to Grand View Research.
Wall Street expects Nvidia's adjusted earnings to grow at 39% annually through fiscal 2027 (ends January 2027). In that context, the current valuation of 71 times adjusted earnings looks a little expensive, so I doubt Nvidia will return 57% in the next 12 months. However, I think investors can buy a small position in the stock today, provided they are comfortable with the possibility of a significant decline post earnings.
