We're witnessing something of a rarity on Wall Street at the moment. While it's perfectly normal for investors to be captivated by a next-big-thing technology or trend, it's uncommon for two of these trends to present at the same time.
Since 2024 began, the rise of artificial intelligence (AI) and stock-split euphoria have been responsible for driving the market's major indexes to record levels.
Image source: Getty Images.
A stock split is an action that allows a publicly traded company to alter its share price and outstanding share count. Keep in mind that these actions are purely superficial and have no effect on a company's market cap or its underlying operating performance.
Although stock splits come in two varieties -- forward and reverse -- investors undeniably gravitate to the former. Whereas reverse-stock splits, which are designed to increase a company's share price, are typically effected from a position of weakness, forward-stock splits are conducted by businesses firing on all cylinders. A forward split aims to make shares more nominally affordable for everyday investors and employees.
Since the curtain opened on 2024, around a dozen phenomenal businesses have announced a stock split -- but none have been more impactful or anticipated than that of AI colossus Nvidia (NASDAQ: NVDA) .
Nvidia sets the stage for other high-flying stocks to follow
Although a handful of high-profile businesses announced their intention to split before Nvidia, including Walmart with its 2-for-1 split and Chipotle Mexican Grill with its historic 50-for-1 forward split , Nvidia's stock split was, by far, the most anticipated.
With its stock trading near $1,000 per share, Nvidia's board announced a 10-for-1 stock split on May 22 , which went into effect after the close of trading on June 7.
The nearly 800% rally (equating to $2.8 trillion in market cap) in Nvidia's stock since the start of 2023 rests entirely on its innovation within AI-driven data centers. Its H100 graphics processing unit (GPU) quickly became the go-to chip in high-compute data centers. TechInsights estimates that Nvidia accounted for 98% of the 3.85 million AI GPUs shipped last year .
The world's leading AI hardware company is also enjoying jaw-dropping pricing power. With demand for AI GPUs easily outpacing supply, Nvidia has been able to dramatically increase the selling price of its chips. The end result has been a 13.8-percentage-point boost in its adjusted gross margin in just the last five quarters (through April 28).
What's more, Nvidia has a software advantage that's working in its favor. The company's CUDA platform is a tool kit used by developers that helps them build large language models. Whether it's hardware or software, Nvidia has the tools to keep its customers contained within its ecosystem and loyal to its products.
The ingredients were in place for Nvidia to announce a stock split in May. But there are three other companies that appear likely to follow in its footsteps and become Wall Street's next stock-split stocks.
Image source: Getty Images.
Costco Wholesale
As I've previously opined, the most logical candidate to become Wall Street's newest stock-split stock is warehouse club retailer Costco Wholesale (NASDAQ: COST) . Costco hasn't split its stock since January 2000, and a single share will set investors back close to $843 as of the closing bell on July 12.
The reasons Costco has outperformed for so long has everything to do with its size and membership-driven operating model.
Similar to Walmart, Costco is able to use its size and deep pockets to its advantage . Being able to buy products in bulk reduces the per-unit cost of each item. This allows the company to undercut local shops and even national grocery chains on price. At a time when inflation is front-page news, Costco is giving its members a value proposition that few other stores can match.
The company's membership model is particularly important . Last week, Costco announced plans to increase the annual cost of its base and executive membership fees by $5 and $10, respectively, to $65 and $130. Membership fees generate exceptionally high margins and provide the buffer that allows Costco to undercut competitors on price.
Furthermore, it's only natural for consumers and businesses to want to maximize their membership rewards. This means they're likelier to stay within Costco's ecosystem of products and services when doing their shopping.
FICO
Another stock that appears likely to mirror Nvidia and conduct a sizable stock split in the not-too-distant future is FICO (NYSE: FICO) , the company previously known as Fair Isaac.
FICO's board has approved four stock splits since going public in 1987. However, the company's last split occurred all the way back in March 2004 . What's more, each prior split for FICO occurred with its stock priced below $100. As of the closing bell on July 12, a single share of FICO was tipping the scales at almost $1,589!
FICO is the company behind the popular credit scores used to determine the worthiness of prospective borrowers. Although FICO's scores segment remained busy when the Federal Reserve held the federal funds target rate at a historically low range of 0% to 0.25%, the true value of the company's solutions has come with the Fed hiking interest rates at the fastest clip in four decades. Economic uncertainty and big changes in monetary policy are what makes FICO's solutions worthwhile to businesses.
FICO's other core operating segment (software) provides various software solutions for companies. This includes analytics and advanced decision-making tools involving customer management, fraud detection, and marketing. The dollar-based net retention rate for FICO's software division was a healthy 112% in the March-ended quarter, which signals that existing clients are spending 12% more this year than they were in the previous year.
Eli Lilly
The third likely candidate to follow in Nvidia's footsteps and become Wall Street's next stock-split stock is the world's largest publicly traded pharmaceutical company , Eli Lilly (NYSE: LLY) .
Since its initial public offering (IPO) in 1952, Eli Lilly has completed four stock splits, the last of which occurred in October 1997! Although its stock ran in place for about two decades following its last split, a complete revamp of its product portfolio and pipeline has sent its shares into the stratosphere. As of the closing bell on July 12, a single share of Eli Lilly was setting investors back almost $949.
The primary catalyst behind Eli Lilly's jaw-dropping gains is its glucagon-like peptide-1 (GLP-1) receptor agonists, which include Mounjaro and Zepbound. GLP-1 therapies are a revolutionary new treatment designed to help people lose weight. (Mounjaro is a type 2 diabetes therapy -- occasionally prescribed off-label for weight loss -- that's sold under the brand name Zepbound for weight loss) This is a sizable addressable market, with the Centers for Disease Control and Prevention noting that roughly 42% of American adults are obese. Sales of Mounjaro and Zepbound collectively totaled more than $2.3 billion in the first three months of 2024.
Eli Lilly's pipeline is making waves, too. For instance, there's the possibility of label expansion opportunities for tirzepatide , the scientific name for Mounjaro and Zepbound. Positive top-line data from a late-stage readout in patients with moderate-to-severe obstructive sleep apnea and obesity, coupled with the drug's existing safety profile, suggest considerable sales upside is still to come.
Don't be surprised if Eli Lilly announces a stock split when it releases its second-quarter operating results in August.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Costco Wholesale, Nvidia, and Walmart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0