Although the second anniversary of Wall Street’s bull market is largely due to enthusiasm around artificial intelligence (AI), it would be a mistake to overlook the key role that stock split euphoria has played in the rise of select market leaders in 2024.
A stock split is a tool available to publicly traded companies that allows them to cosmetically adjust their share price and outstanding share count by the same factor. These changes are telling in the sense that they do not alter a company’s market capitalization or its operating performance.
While splits come in two varieties (forward and reverse), investors overwhelmingly favor one over the other. Since reverse splits (the type designed to increase a company’s stock price) are typically carried out from a position of operational weakness, it is the type of split that most investors avoid. Meanwhile, forward splits, which reduce a company’s stock price to make it nominally more affordable to ordinary investors, are typically done by companies with well-defined competitive advantages. This is the type of split that investors flock to.
In the past nine months, more than a dozen brand-name companies have completed a stock split. However, the outlook for these split stocks differs quite a bit, based on price targets issued by select Wall Street analysts.
In particular, three industry-leading stock splits offer implied upside of up to 111%.
Nvidia: implied 45% increase
Perhaps it’s no surprise that one of the split stocks with the greatest growth potential, as predicted by at least one Wall Street analyst, is the company leading the AI revolution. NVIDIA (NASDAQ: NVDA). Nvidia joined this elite stock split club in June with a historic 10-for-1 split.
Analyst Hans Mosesmann of Rosenblatt Securities expects this transformative company to reach $200 per share, which would represent a 45% return from its closing price on October 14 and turn Nvidia into a roughly $5 trillion business. .
Nvidia’s near-parabolic move is a result of its hardware becoming the “brains” of AI-accelerated data centers. Demand for the company’s H100 graphics processing unit (GPU) and its successor, the Blackwell GPU architecture, has been strong, leaving little room for outside competitors.
When a good or service in demand is in short supply, the laws of economics establish that the price of that good or service will increase until demand stabilizes. Nvidia’s H100 has commanded a price premium of between 100% and 300% over other AI GPUs, which has helped notably boost the company’s adjusted gross margin.
Additionally, Nvidia’s CUDA software platform is doing its part to keep the company’s customers loyal to its ecosystem. CUDA is the toolset that developers rely on to create great language models and squeeze the most computing power possible from their Nvidia GPUs.
But while Mosesmann’s goal of an additional 45% increase appears achievable, there is also reason to believe that Nvidia stock has peaked. For example, no revolutionary innovation, over three decades, has prevented an event that bursts a bubble at the beginning of its expansion.
Furthermore, internal competition is increasing considerably. With Nvidia’s four largest customers developing their own AI GPUs, Nvidia may find future order opportunities for its hardware limited.
Sirius XM Holdings: Implied 60% Increase
A second division stock that one Wall Street analyst says could skyrocket is satellite radio operators. Sirius XM Holdings (NASDAQ:SIRI). Sirius XM is the only high-profile 2024 stock split to complete a reverse split (1 of 10).
Leading analyst Matthew Harrigan believes Sirius XM stock is headed for $43. If accurate, this would imply a 60% increase, depending on where the company’s shares closed the October 14 trading session.
Although the company’s subscriber numbers have declined in consecutive quarters, which is mainly due to tepid auto sales, it brings clear-cut competitive advantages to the table.
Sirius XM’s most obvious competitive advantage is that it is a legal monopoly. While being the only licensed satellite radio operator doesn’t mean the company is free of competition for listeners, it does give Sirius XM substantial power to set subscription prices.
Sirius XM’s omnichannel presence is another source of strength. Most traditional radio operators generate almost all of their revenue from advertising. Although this strategy works very well during prolonged economic expansions, it can cause problems during inevitable recessions.
During the first half of 2024, Sirius XM generated less than 20% of its net sales from ads and about 77% from subscriptions. A subscription-driven model leads to highly predictable cash flow and makes Sirius XM less likely to experience wild fluctuations in revenue and earnings during changes in the economic cycle.
The final factor on Sirius XM’s side is its historically cheap valuation. Even after a nice rebound from the lowest closing price in the last decade, the company’s shares are valued at about 8 times next year’s earnings. This represents a bargain for long-term-minded investors.
Super Micro Computer: implied increase of 111%
But the stock split that offers the biggest upside, according to one Wall Street analyst’s forecast, is the specialist in customizable rack server and storage solutions. super microcomputer (NASDAQ:SMCI). Super Micro completed its first forward split, 10 for 1, after the close of trading on September 30.
Wall Street’s biggest bull on Super Micro Computer is Loop Capital analyst Ananda Baruah. Baruah’s $100 price target, which has been split and adjusted down from $1,000, implies upside potential of up to 111%.
While Nvidia’s AI GPUs are the hottest thing since sliced bread, there is an opportunity for businesses across the data center economy to thrive. Super Micro happens to be one of the providers of customizable rack servers used in high-computing data centers. Its servers also feature the H100 GPU, which is presumably increasing demand for the company’s infrastructure solutions.
Super Micro’s revenue acceleration has been surprising. Net sales increased 110% in fiscal 2024 (ended June 30) to $14.94 billion, and the company guided net income to a range of $26 billion to $30 billion in the year. fiscal year 2025. The upper limit would represent consecutive years of triple-digit growth.
However, not everything is rosy for this infrastructure colossus. Prominent short seller Hindenburg Research has alleged “accounting manipulation” at Super Micro, which the company has denied. Despite this denial, the United States Department of Justice has reportedly opened an early-stage investigation into the company and Super Micro has delayed the presentation of its annual report. Not the best look for a S&P 500 company.
It’s also worth noting that Super Micro Computer is to some extent at the mercy of its suppliers. Just as the addition of Nvidia’s H100 GPUs has made its customizable rack servers the top choice for companies building their AI-accelerated data centers, the buildup of this in-demand GPU could put a low ceiling on the upside. from Super Micro.
Until the company’s accounting issues are resolved and its annual report is filed with the Securities and Exchange Commission, a triple-digit increase for its stock does not appear possible.
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Sean Williams has positions at Sirius XM. The Motley Fool has positions and recommends Nvidia. The Motley Fool has a disclosure policy.
Three Stock Splits Offering Up to 111% Upside, According to Select Wall Street Analysts originally published by The Motley Fool