Despite artificial intelligence Stock splits have been the talk of Wall Street for most of the past two years, and the euphoria surrounding companies executing stock splits has been an equally important catalyst for the stock market in 2024.
A stock split is a tool available to publicly traded companies that allows them to change the price of their stock and the number of shares outstanding by the same amount. It is cosmetic in the sense that a stock split has no impact on the company’s market value or its underlying operating performance.
There are two categories of stock splits, one of which is attractive to investors. far A reverse stock split is intended to increase a company’s stock price, often to ensure continued listing on a major stock exchange. By comparison, a forward stock split reduces a company’s stock price, usually with the purpose of making the shares nominally more expensive for individual investors and/or employees.
While reverse stock splits are typically done from a position of operational weakness, companies that execute forward stock splits typically outperform their competitors and are ahead of the innovation curve within their industries. In short, investors often flock to companies that complete forward stock splits.
Since the beginning of 2024, 13 exceptional companies announced or completed stock splits.12 of which are of the forward-splitting variety. While none of them are perhaps more famous than the AI leaders Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO)This week, attention turns to the two newest members of Wall Street’s stock split club.
Nvidia and Broadcom stock splits were the most anticipated on Wall Street
The hype surrounding AI is so huge that investors could cut it with a knife. Since the start of 2023, Nvidia shares have risen 639%, as of the closing bell on Sept. 3, with Broadcom up 173%. These massive gains forced Nvidia to complete a 10-for-1 split in early June, while Broadcom conducted its first-ever split, also a 10-for-1, in mid-July.
The fuel behind Nvidia’s epic success that briefly made it the world’s largest publicly traded company is its top-tier graphics processing units. The company’s H100 GPU is the go-to choice in AI-powered data centers.
More importantly, demand for the H100 and the Blackwell platform, which will debut in early 2025, is backlogged. When demand for a product easily outstrips supply, the price of that product tends to rise. The H100 GPU typically costs 100% to 200% more than the Advanced Micro Devices“MI300X AI-GPU. For Nvidia, this has led to a significant increase in gross profit margin since the beginning of 2023.”
As for Broadcom, it has risen to the top spot as a provider of choice for AI-based networking solutions. The Jericho3-AI architecture, which will be introduced in Q2 2023, has the capacity to connect up to 32,000 GPUs in high-computation data centers. The goal of Broadcom’s solution is to reduce latency and help companies get the most computing power out of their GPUs.
However, Broadcom has a much more diversified revenue stream than Nvidia. It is one of the leading providers of wireless chips and accessories used in 5G smartphones, and it provides a wide range of optical components and networking solutions to industrial and automotive companies.
But Nvidia and Broadcom have had a moment of interest after their stock splits. This week, two new companies are set to take center stage.
Sirius XM Holdings
One of the latest Wall Street stocks to split, and the only one of 13 companies set to complete a reverse split, is satellite radio operator Sirius XM Holdings (NASDAQ: Siri).
Sirius XM is in the final stage of its merger with Liberty Media’s Sirius XM, Liberty Sirius XM Collection (NASDAQ:LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK)which is expected to cease trading after the closing bell on September 9. The merger is being implemented to create a unified class of Sirius XM common stock.
Upon completion of the merger — that is, after the close of trading on September 9 — Sirius XM will conduct a 1-for-10 reverse stock split.
While I’ve noted that reverse splits are typically done from a position of operational weakness, that’s not the case with SiriusXM, which is facing delisting. The company has about 3.85 billion shares outstanding, which has kept its stock price in the mid-single digits for more than a decade. Some institutional investors may view low-priced stocks as risky. This upcoming split, which will boost its stock price by a factor of 10, could put the company on the radar of deeper-pocketed investors.
Despite not growing at a rapid pace, Sirius XM still has a number of competitive advantages. For example, being the only licensed satellite radio operator gives it a level of subscription pricing power that almost guarantees it will stay ahead of the inflation curve. Spotify Technology After Sirius XM recently increased the cost of its subscription, it seems like a good option to follow suit and raise its prices in the coming months.
Sirius XM also generates its revenue in a markedly different way than traditional radio operators. While most terrestrial and internet radio companies rely heavily on advertising revenue to stay afloat, Sirius XM generated nearly 77% of its net sales through the first six months of 2024 from subscriptions.
While the advertising-based operating model works well during long periods of economic expansion, it can lead to disruption during the inevitable downturn in the U.S. economy. At the same time, Sirius XM subscribers are less likely to cancel their service than companies that cut their marketing budgets when economic uncertainty sets in. In short, Sirius XM is on a safer footing than its peers.
Strips
Another stock that split and will take center stage this week is the leader in uniforms and business services. Strips (NASDAQ: CTAS).
On May 2, the company’s board of directors approved a 4-for-1 stock split, which is scheduled to take place after the close of trading on September 11. This will be the sixth time Cintas has split its stock since its initial public offering in August 1983. With the company’s stock up about 84,000% since its IPO, or 124,800%, including dividends, the stock split is a must.
Although providing corporate uniforms and various business accessories, such as floor mats and safety equipment, is not a pioneering operating model, Cintas is able to take advantage of the non-linear nature of the economic cycle.
Since World War II ended 79 years ago, only three of the 12 recessions in the United States have lasted longer than 12 months, and none have lasted longer than 18 months. Most economic expansions, on the other hand, have lasted for many years, including two growth periods that exceeded 10 years. Long growth periods disproportionately benefit companies like Cintas that are tied to the health of the U.S. economy.
Another reason for Cintas’s massive surge is its diverse customer base. Cintas claims to serve more than a million businesses. That means no single customer is critical to its success or capable of turning the ship upside down.
Inorganic growth has been another key driver for Cintas. Management has overseen a number of acquisitions since the turn of the century, including Zee Medical in 2015 and G&K Services in 2017. In addition to being profitable, these acquisitions have helped expand Cintas’ product offering, as well as enhance cross-selling opportunities.
This week, it’s all about Sirius XM and Cintas.
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Sean Williams The Motley Fool has positions in Sirius XM. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Spotify Technology. The Motley Fool recommends Broadcom and Cintas. The Motley Fool has Disclosure Policy.
Step aside, Nvidia and Broadcom: Wall Street’s latest two stocks to split take center stage this week Originally posted by The Motley Fool
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