This year has seen a flurry of high-profile stock split announcements, with giants like Walmart, Chipotle Mexican Grill, and Lam Research making headlines. While stock splits don’t alter a company’s core metrics, they do tend to spark investor interest. Furthermore, studies indicate that stock-split stocks often outperform the market.
Stocks that Split: Nvidia’s Meteoric Rise and Cautionary Valuation
Nvidia, a tech darling, has witnessed a meteoric rise in its valuation, soaring from a $280 billion market cap to over $3 billion in less than two years. This surge prompted Nvidia’s board to approve a 10-for-1 stock split in May, slashing its stock price from over $1,200 to around $120. However, these splits, like slicing a pizza into smaller slices, merely repackage existing value without altering the fundamentals.
Investors face a critical juncture as Nvidia’s price-to-sales ratio currently stands at a staggering 37x, significantly higher than its historical average of 8.4x. While Nvidia’s revenue has nearly tripled to $70 billion recently, much of its stock surge is attributed to inflated prices. Investors are essentially betting on future growth, a risky gamble that may prompt them to seek better value elsewhere.
Broadcom’s Maiden Stock Split: Riding the AI Wave
Broadcom, leveraging the power of artificial intelligence (AI) in its operations, recently executed its first stock split. The tech giant, buoyed by an 80% stock surge in the past year, remains an attractive buy, showcasing resilience in a volatile market.
Having historically been a growth stock marvel, Broadcom’s IPO launch at a split-adjusted price of $1.50 per share in 2009 has seen its stock price increase over 100-fold. The company’s dividend, now at a substantial $2.10 per share, outshines its humble IPO beginnings. Despite these stellar gains, investors must monitor critical financial metrics, such as a recent 53% yearly drop in net income, leading to a spike in the P/E ratio to 69.
While Broadcom’s high P/E ratio may pose a financial risk, sustained revenue growth of 39% indicates ongoing market traction. However, any shift in investor sentiment could potentially challenge the stock’s stability in the future.
The Dynamics of Stock Splits in Tech Giants
Microsoft’s Potential for a Stock Split
The technology behemoth, Microsoft, has a storied past with stock splits. In the 1990s, Microsoft was known for frequent stock splits until the dot-com bubble burst in 2000. It took nearly two decades for the stock to recover from the aftermath. However, fueled by advancements in cloud computing and artificial intelligence, Microsoft has now reached unprecedented heights.
With share prices soaring, investors and employees are sitting on substantial gains accrued from holding Microsoft stock. The prospect of selling shares in $400 to $500 increments may deter some from cashing in. A potential stock split could pave the way for greater flexibility among stakeholders. By reducing the share price, a split would allow for easier accumulation of shares, especially for those with limited capital for significant investments.
The Road Ahead for Microsoft
Analysts foresee Microsoft’s earnings to grow by an average of over 16% annually for the next three to five years. The stock’s current forward P/E ratio of 34 is deemed reasonable, considering the anticipated growth trajectory. As Microsoft gears up for robust earnings growth in the foreseeable future, a stock split emerges as a strategic move to attract more investors.
In light of the promising outlook, investors are advised to keep a watchful eye on Microsoft as a potential stock split candidate in the near future.
Evaluating Investment in Nvidia
Before diving into Nvidia stock, it’s essential to weigh the considerations.
Reflecting on Nvidia’s Past Performance
The Motley Fool Stock Advisor team recently highlighted the top 10 stocks for investors to consider, with Nvidia not making the cut. While Nvidia may have missed out on this list, historical data paints a different picture. Rewind to April 15, 2005, where a $1,000 investment in Nvidia could have bloomed into a staggering $722,626 today!
The Stock Advisor service, known for propelling investors towards success, has outperformed the S&P 500 by a substantial margin since 2002.
Navigating Investment Choices
With an array of investment options available, it’s crucial to ponder on the investment landscape. Make informed decisions, keeping a keen eye on opportunities that align with your financial goals and risk appetite.
