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2 stock splits to buy now with confidence, and 1 to avoid

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2 stock splits to buy now with confidence, and 1 to avoid

Volatility and uncertainty are something every investor has to deal with. Even though we are in turmoil bull market at this point, this decade started with all three major stock indexes alternating between bear and bull markets in successive years (through 2023).

When times got tough on Wall Street, investors long sought the safety of FAANG stocks. But over the past three years, it has been the stock splits that have provided the certainty for investors.

A blank paper stock certificate for shares of a publicly traded company. A blank paper stock certificate for shares of a publicly traded company.

Image source: Getty Images.

A stock split is a mechanism that allows a publicly traded company to change its stock price and the number of shares outstanding without affecting its market capitalization or operating performance. Stock splits come in two forms: forward and reverse.

With a forward-stock split, a company wants to lower its stock price to make its shares more nominally affordable to ordinary investors who may not be able to purchase fractional shares from their broker. Companies also sometimes conduct forward splits to encourage their employees to participate in an employee stock purchase plan.

Meanwhile, a reverse stock split aims to increase a company’s stock price to ensure it meets ongoing minimum listing standards on an exchange.

By all accounts, investors are attracted to high-flying stocks that deliver forward splits. Since this year started, eight high-profile companies have announced and/or completed stock splits with clearly defined competitive advantages.

However, the prospects for these eight stock splits vary quite a bit. While two of these stock-split stocks can be bought with confidence by patient investors, another could leave shareholders disappointed.

Stock split number 1 to buy with confidence right now: Broadcom

Among the 2024 stock class, none appear to have a brighter future than the semiconductor solutions giant Broadcom (NASDAQ:AVGO). Broadcom’s board approved a 10-for-1 stock split on June 12 (the first in the company’s history), effective July 15.

There’s absolutely no doubt that artificial intelligence (AI) has fueled the rise of Broadcom’s stock. The company decisively entered the AI-accelerated data center space last year when it introduced its Jericho3 chip, which is tasked with connecting up to 32,000 high-compute graphics processing units (GPUs) in AI-accelerated data centers. Broadcom’s networking solutions reduce tail latency and accelerate the computation and decision-making needed for AI-powered software and systems.

While there are good arguments that AI will eventually succumb to a bubble burst in the same way every other next-big-thing innovation has in the last thirty years, Broadcom’s secret sauce is that it does a lot more than just develop on AI based solutions.

For example, a significant portion of its revenue and operating cash flow comes from sales of wireless chips and accessories found in smartphones. Wireless carriers upgrading their networks to support 5G speeds and steadily expanding their 5G coverage to businesses and residential consumers across the country have created an ongoing device replacement cycle that is driving demand for Broadcom’s next generation wireless solutions.

Broadcom also has a range of products and solutions that go beyond smartphones. It supplies sensors used in automated industrial equipment, develops vehicle connectivity solutions, and offers financial software and cybersecurity solutions, along with a host of other products and services that go far beyond smartphones and high-compute data centers.

Broadcom is ideally positioned to navigate an AI bubble, should one occur. While the forward price-to-earnings ratio of 29 isn’t cheap in the traditional sense, Broadcom’s ability to generate annualized earnings growth of around 20% makes this valuation much more attractive to long-term investors.

A person writing and circling the word A person writing and circling the word

Image source: Getty Images.

Stock split number 2 that can now be picked up with confidence: Sony Group

The other great stock split of 2024 that investors can now snap up with confidence is the Japan-based consumer electronics titan. Sony group (NYSE: SONY). Sony’s board announced plans to execute a 5-for-1 forward split on May 14, with an effective date for the company’s American Depositary Receipts (ADRs) of October 8.

It’s no secret that the gaming industry is cyclical. The PlayStation 5 gaming console has been in stores for more than three years, causing sales to decline somewhat. The good news for Sony is that it has other catalysts that could boost its valuation and earnings until the next-generation console debuts (likely in 2027).

For example, while console sales aren’t impressive, PlayStation Plus subscription revenues are up. PlayStation Plus is the company’s service that allows subscribers to store their game data in the cloud and play games with friends. Subscription revenue is recurring, high-margin, and typically generates significantly better margins than hardware sales such as consoles. Think of this as the perfect setup for a razor (console) and blades (PlayStation Plus).

In addition to improved revenue from gaming subscriptions, Sony is one of the leading manufacturers of image sensors used in next-generation smartphones. Just as Broadcom’s wireless chips benefit from the ongoing device replacement cycle, Sony is enjoying solid sales growth for its Imaging and Sensing Solutions segment.

Sony Group is also the cheapest stock split stock among the top eight companies announcing a split in 2024. Shares of the company can be picked up for less than 15 times next year’s earnings.

The icing on the cake is that the board of the Sony Group has also approved a share buyback program in addition to the demerger. If fully implemented, almost 2.5% of all outstanding shares could be repurchased, which should have a modest positive impact on earnings per share, and make this stock even more fundamentally attractive to value-oriented investors.

The stock split worth avoiding: Nvidia

At the other end of the spectrum are the hottest AI stocks in the world, and perhaps the most anticipated stock split company of 2024. Nvidia (NASDAQ: NVDA), is the high flyer you should avoid. Nvidia announced a 10-for-1 split on May 22 – its second split since July 2021 – which took effect after the close of business on June 7.

On paper, Nvidia has done everything Wall Street (and some) expected. The company’s AI GPUs have sold like hotcakes, with Nvidia unable to fulfill all orders received. The arguably overwhelming supply of demand has allowed the company to increase the retail price of its H100 GPU and boost its adjusted gross margin to a solid 78.4%, as of the end of its first fiscal quarter (ended April 28) .

But even the best companies in the world face headwinds, and Nvidia’s are increasing.

Throughout 2024, external competition in AI-accelerated data centers will increase. Intel And Advanced micro devices introduce their direct competitors on Nvidia’s H100 GPU. What Wall Street and investors may be overlooking is that even if Nvidia’s GPUs maintain a compute advantage, the company’s inability to meet corporate demand opens the door for these newer entrants to gain market share.

Additionally, Nvidia will face competitive pressure from its own customer base. The four largest customers, which account for approximately 40% of net revenue, are all developing AI GPUs in-house for their data centers. Again, even if Nvidia’s chips remain far superior in many respects, the mere presence of these other chips reduces the AI ​​GPU scarcity that has fueled its pricing power. Translation: It’s bad news for Nvidia’s adjusted gross margin.

The final piece of the puzzle, which I alluded to earlier, is that every critically acclaimed trend, technology or innovation that has emerged in the last thirty years has suffered the same fate. Investors consistently overestimate how quickly a new innovation or technology will achieve mainstream adoption, leading to a bubble. It seems unlikely that AI will break this historical trend, which bodes poorly for Nvidia.

Should You Invest $1,000 in Broadcom Now?

Consider the following before buying shares in Broadcom:

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Sean Williams holds positions at Intel. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has one disclosure policy.

2 stock splits to buy now with confidence, and 1 to avoid was originally published by The Motley Fool