Although Wall Street was rightly fascinated by the long-term potential Artificial Intelligence (AI) – Analysts at PricewaterhouseCoopers believe that artificial intelligence could add $15.7 trillion to the global economy by 2030 – and the excitement surrounding stock splits has played a significant role in lifting Wall Street’s major stock indexes to record levels in 2024.
A stock split is an event that allows a publicly traded company to change its stock price and the number of outstanding shares by the same factor. Keep in mind that these adjustments are purely cosmetic and have no impact on the company’s market value or underlying operating performance.
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Since the consumer goods juggernaut Walmart The party got started with the completion of a 3-for-1 split in late February, and more than a dozen high-profile companies have followed in its footsteps, All but one were of the forward type. Futures splits are designed to reduce a company’s stock price to make it more accessible to ordinary investors who lack access to fractional stock purchases with their broker.
While many of the Class of 2024 stock splits are market leaders, their outlook can vary widely. As we head into November, one stock unique to the stock split stands out as a bargain, while two others are worth avoiding.
Although most investors are attracted to companies that implement forward splits, the only notable reverse split for 2024 is a unique stock that can be confidently acquired in November. I’m talking about the satellite radio operator Sirius XM Holdings (NASDAQ:SIRI)which completed a 1-for-10 reverse split upon the closing of its merger with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group, after the close of trading on September 9.
Companies that complete reverse stock splits often do so to avoid delisting from a major stock exchange. What makes Sirius XM unique is that there was no risk of booting from the system Nasdaq exchange. However, it spent more than a decade hovering between $2 and $7 per share. With some institutional investors shunning stocks priced below $5 per share, this split is designed to put Sirius XM back on the radar of Wall Street’s smartest money managers.
One of the most attractive aspects of using your money for Sirius XM is that it is a legal monopoly. Although it still fights for listeners with traditional radio operators, it is the only company with a satellite radio license. This provides a significant boost to subscription pricing power in the long term.
Another key differentiator for Sirius XM is how it generates revenue. Terrestrial and online radio providers almost exclusively generate sales via advertising. While this works great during long periods of economic expansion, it can be troublesome when companies trim their marketing budgets during recessions. Sirius XM generated just 20% of its net revenue from advertising during the first nine months of 2024.
By comparison, Sirius XM generated nearly 77% of its $6.5 billion in net sales from subscriptions this year. Subscriptions provide predictable cash flow, with subscribers much less likely to cancel their services than companies to cut their advertising spending at the first sign of economic turmoil.
Finally, Sirius XM offers a compelling value proposition with a market-beating yield of 4%. The stock can be gobbled up for just 8 times forward year’s earnings, which is a stone’s throw from its 30-year all-time low as a public company.
But not all stock splits are worth buying in November. Early stock investors would be wise to stay away from customizable rack and server storage solutions specialists Super micro computer (NASDAQ: SMCI). Super Micro conducted its first-ever split, 10-for-1, after the close of trading on September 30.
To be fair, there have been plenty of bright spots for the company over the past year. In fiscal 2024, which ended June 30, Super Micro posted a 110% increase in sales to $14.9 billion, and it expects revenue in its current fiscal year to rise to a range of $26 billion to $30 billion.
The fuel behind Super Micro Computer’s rise is its customizable servers, which are integrated NvidiaVery popular graphics processing units (GPUs). Companies wanting to take advantage of the AI revolution have demonstrated their willingness to spend significant sums on the infrastructure needed to do so.
But it wasn’t all peaches and cream for the previously high-flying AI stock. In late August, short-selling firm Hindenburg Research issued a report alleging “accounting fraud” on the part of Super Micro. Although the company has denied the allegations, it has since delayed the submission of its annual report and is, according to… Wall Street Journaland faces an early investigation from the US Department of Justice.
To make matters worse, Ernst & Young resigned as Super Micro Computer’s accounting firm last week. With Ernst & Young previously raising concerns about Super Micro’s internal controls, this adds to Hindenburg’s allegations. While I’m not here to pass judgment on Super Micro’s accounting practices, at the very least the company’s stock should be embargoed until this issue is resolved and its annual report is filed.
To round things off, Super Micro is relying on its suppliers, including Nvidia, to maximize its AI opportunities. With orders for Nvidia’s AI-GPUs backlogged, there’s a real possibility that the Super Micro Computer will fail to reach its full potential.
The second high-flying stock that savvy investors should avoid in November, and perhaps well beyond, is AI-powered enterprise analytics software provider Accurate strategy (NASDAQ:MSTR). MicroStrategy’s board announced a historic 10-for-1 forward split in July, which was implemented after the close of trading on August 7.
Although MicroStrategy’s primary revenue driver for decades has been its software division, the bulk of its $50 billion market capitalization is tied to its business. Bitcoin (Crypto: Bitcoin) Collectibles. As of September 20, it held 252,220 BTC, representing 1.2% of all tokens that will ever be mined. However, there are three glaring flaws in MicroStrategy’s operating approach that simply cannot be ignored.
The main reason to avoid MicroStrategy is the unjustified valuation premium for its Bitcoin portfolio. As of this writing late in the evening of October 31, a single bitcoin was tipping the scales at $69,362, putting the value of MicroStrategy’s cryptocurrency assets at $17.56 billion. But Wall Street currently values the company’s Bitcoin at $49 billion (assuming a generous $1 billion valuation for the company’s software division). There is absolutely nothing that justifies paying a 179% premium over the current price of Bitcoin.
Secondly, MicroStrategy’s method of obtaining Bitcoin is very dangerous in my opinion. These purchases were financed through convertible debt offerings. Although the company expects annual interest expenses on its total debt of more than $4.2 billion to reach just $34.6 million, it has burned through $35.7 million in cash from its operating activities during the first nine months of 2024. There are serious questions about MicroStrategy’s ability to service Its debts.
To build on this point, MicroStrategy has put together a ramp-up plan (hope you’re sitting down for this) 42 billion dollars In capital over the next three years to buy Bitcoin. It plans to issue $21 billion worth of its shares through ongoing market offerings, which would dilute existing shareholders, in addition to $21 billion worth of fixed-income securities.
The icing on the cake is that MicroStrategy’s sole source of operating cash flow — its AI enterprise analytics software segment — has seen its sales decline by double digits over the past decade.
MicroStrategy has all the hallmarks of a bubble that will eventually burst.
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Sean Williams He has positions at Sirius XM. The Motley Fool has positions in and recommends Bitcoin, Nvidia, and Walmart. The Motley Fool recommends NASDAQ. The Motley Fool has Disclosure policy.
1 Unique Stock Split That’s a Great Buy in November, and 2 to Avoid Originally published by The Motley Fool