Despite historically hot trends like artificial intelligence (AI) dominating headlines on Wall Street, it’s stock-split euphoria that’s played an equally impressive role in sending the broader market higher in 2024.
Put simply, a stock split is a tool publicly traded companies can lean on to adjust their share price and outstanding share count by the same factor. The beauty of stock splits is they’re entirely cosmetic and have no effect on a company’s market cap or underlying operating performance.
There are two types of stock splits — forward and reverse — with the former being far more popular than the latter among the investing community.
Reverse splits are enacted to increase a company’s share price, often with the goal of maintaining continued listing standards for a major stock exchange. Since most reverse-stock splits are conducted from a position of operating weakness, investors tend to keep their distance from this variety of split.
Meanwhile, forward-stock splits are designed to reduce a company’s share price to make it more nominally affordable for retail investors who lack access to fractional-share purchases through their broker. Companies with high-flying stocks that require a forward split to make their shares more “nominally affordable” are usually out-executing and out-innovating their competition.
Since the curtain opened on 2024, 13 phenomenal businesses have announced or completed stock splits — none of which have been more anticipated than that of AI juggernaut Nvidia (NASDAQ: NVDA). Given that companies conducting forward splits have, since 1980, more than doubled the return of the benchmark S&P 500 in the 12 months following their split announcement, investors are eager to guess which top-tier stock will be next to unveil a forward-stock split.
Nvidia had all the hallmarks of a Wall Street stock-split stock
Prior to Nvidia announcing its largest-ever forward split (10-for-1) on May 22, there were more than enough clues to suggest that a stock split was imminent.
The obvious clue with Nvidia was that its stock had increased by 550% between the start of 2023 and the day it released its fiscal first-quarter operating results, where it revealed its historic split. No one on Wall Street has ever witnessed a market-leading company add around $2.8 trillion in market cap in what feels like the blink of an eye.
To build on this point, Nvidia’s jaw-dropping returns have made it particularly popular with everyday investors. It’s become the fourth most-held security (including exchange-traded funds) on retail investor-dominated online trading platform Robinhood. Not requiring retail investors to save $1,300 to purchase a single share of Nvidia might help sustain the euphoria behind its near-parabolic climb.
Nvidia’s market-leading status among graphics processing unit (GPU) developers for AI-accelerated data centers also made it a logical candidate to conduct a stock split. Semiconductor analysis firm TechInsights estimates that of the 2.67 million data-center GPU shipments in 2022 and 3.85 million GPU shipments in 2023, Nvidia accounted for all but 30,000 GPUs shipped in 2022 and 90,000 GPUs shipped in 2023. It’s grabbed a stranglehold of the GPU market share that’s powering generative AI solutions and training large language models (LLMs) in enterprise data centers.
The company’s CUDA computing platform provides yet another reason Nvidia splitting its stock made sense. CUDA is the toolkit that helps developers build LLMs and speed up computing applications. The key point is that Nvidia’s software is working in tandem with its top-tier hardware to keep businesses loyal to its myriads of products and services.
With Nvidia laying the blueprint for what to look for in future stock-split stocks, there’s one logical candidate that stands out.
Prediction: This 150,000% gainer will be the next high-profile stock split announcement on Wall Street
In terms of brand-name, time-tested, dominant companies, I’d expect Wall Street’s next high-level stock split announcement to come from warehouse club Costco Wholesale (NASDAQ: COST).
Although no stock goes up every year, Costco has come very close to breaking the mold. Including dividends paid, Costco has delivered a positive total return to its shareholders in 20 of the last 23 years. More impressively, its shares have increased in value by 150,000%, including dividends, since its initial public offering (IPO) in December 1985.
It’s been close to a quarter of a century since Costco last conducted a stock split, with its three prior splits occurring in January 2000 (2-for-1), March 1992 (3-for-2), and May 1991 (2-for-1). With shares of the company approaching $900, it’s fair to assume that some everyday investors without access to fractional-share purchases are being forced to stay on the sidelines.
One of Costco’s biggest and clearest competitive advantages is its size. The company’s deep pockets allow it to purchase goods in bulk, which lowers the per-unit cost of each item. With price being such an important concern for shoppers, buying in bulk has consistently helped Costco undercut traditional grocery chains and mom-and-pop shops on cost.
It’s important to note that Costco’s warehouses sell a mix of discretionary goods and consumer staples. Regardless of how well the U.S. economy is performing or what the prevailing rate of inflation is, consumers still need to purchase groceries and basic household necessities. In other words, Costco is drawing in consumers in all economic climates, which typically leads to highly predictable sales and operating cash flow.
Another identifiable edge Costco brings to the table is its membership-driven operating model. Annual membership fees generate high margins and can be used to offset the low prices and razor-thin margins for groceries that help the company court new members. Plus, paying an annual fee to shop at Costco is liable to encourage consumers to get as much out of their membership as possible. In short, they’re going to choose Costco over other shopping destinations when making large purchases.
The final piece of the puzzle for Costco is its exceptional pricing power. Beginning on Sept. 1, the annual fees for its Gold Star and Business memberships will increase $5 to $65, while Executive memberships will jump $10 to $130 per year. The first increase in membership fees since 2017 isn’t going to scare away this warehouse club’s fiercely loyal customers.
So when Costco lifts the hood on its fiscal fourth-quarter operating results on Sept. 26, don’t be surprised if it also unveils its first stock split since January 2000.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Nvidia. The Motley Fool has a disclosure policy.
Prediction: Wall Street’s Next Stock Split Announcement Will Come From a Company That’s Gained 150,000% Since Its IPO was originally published by The Motley Fool
