Although Wall Street has been rightly enamored with the long-term potential for artificial intelligence (AI) — the analysts at PwC believe AI can add $15.7 trillion to the global economy by 2030 — the excitement surrounding stock splits has played a meaningful role in lifting Wall Street’s major stock indexes to record highs in 2024.
A stock split is an event that allows a publicly traded company to alter its share price and outstanding share count by the same factor. Keep in mind that these adjustments are entirely cosmetic and have no effect on a company’s market cap or its underlying operating performance.
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Since consumer goods juggernaut Walmart started the party by completing a 3-for-1 split in late February, more than a dozen high-profile companies have followed in its footsteps, all but one of which has been of the forward variety. Forward splits are designed to reduce a company’s share price to make it more nominally affordable for everyday investors who lack access to fractional-share purchases with their broker.
While many of these “Class of 2024” stock-split stocks are market-leading businesses, their outlooks can significantly differ. As we push forward into November, one unique stock-split stock stands out as nothing short of a screaming bargain, while two others are worth avoiding.
Although most investors gravitate to companies enacting forward splits, the only prominent reverse split of 2024 is the unique stock that can be confidently scooped up in November. I’m talking about satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI), which completed a 1-for-10 reverse split upon consummation of its merger with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group, following the close of trading on Sept. 9.
Companies completing reverse stock splits often do so to avoid delisting from a major stock exchange. What makes Sirius XM unique is it that it was no danger of being booted from the Nasdaq exchange. It has, however, spent more than a decade vacillating between $2 and $7 per share. Since some institutional investors avoid stocks priced below $5 per share, this split was designed to put Sirius XM back on the radar of Wall Street’s smartest money managers.
One of the most-appealing aspects of putting your money to work in Sirius XM is that it’s a legal monopoly. Even though it’s still fighting for listeners with traditional radio operators, it’s the only company that possesses a satellite-radio license. This provides a boost to its long-term subscription pricing power.
Another key differentiating factor for Sirius XM is how it generates revenue. Terrestrial and online radio providers almost exclusively bring in sales via advertising. While this works great during lengthy periods of economic expansion, it can be troublesome when businesses pare back their marketing budgets during downturns. Sirius XM has brought in only 20% of its net revenue from advertising through the first nine months of 2024.
Comparatively, Sirius XM has generated close to 77% of its $6.5 billion in net sales from subscriptions this year. Subscriptions provide predictable cash flow, with subscribers far less likely to cancel their service than businesses are to cut their ad spending at the first sign of economic turbulence.
Lastly, Sirius XM offers a compelling value proposition and a market-topping 4% yield. Shares can be gobbled up for only 8 times forward-year earnings, which is a stone’s throw from an all-time-low multiple over its 30 years as a public company.
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But not all stock-split stocks are worth buying in November. The first stock investors would be wise to steer clear of is customizable rack server and storage solutions specialist Super Micro Computer(NASDAQ: SMCI). Super Micro conducted its first-ever split, 10-for-1, following the close of trading on Sept. 30.
To be fair, there have been plenty of bright spots for the company over the last year. In fiscal 2024, which ended June 30, Super Micro recorded a 110% increase in sales to $14.9 billion, and is expecting revenue to climb in its current fiscal year to a range of $26 billion to $30 billion.
The fuel behind Super Micro Computer’s ascent is its customizable rack servers, which are incorporating Nvidia‘s ultra-popular graphics processing units (GPUs). Businesses wanting to capitalize on the AI revolution have shown a willingness to spend big bucks on the infrastructure needed to make it happen.
But it hasn’t been all peaches and cream for this previously high-flying AI stock. In late August, noted short-seller Hindenburg Research issued a report that alleged “accounting manipulation” on Super Micro’s part. Despite the company denying these claims, it has since delayed the filing of its annual report and is, per the Wall Street Journal, facing an early stage probe from the U.S. Justice Department.
To make matters worse, Ernst & Young resigned as Super Micro Computer’s accounting firm last week. With Ernst & Young having previously raised concerns about Super Micro’s internal controls, it adds fuel Hindenburg’s allegations. Though I’m not here to pass judgment on Super Micro’s accounting practices, at the very least the company’s stock should be off-limits until this issue is resolved and its annual report is filed.
To round things out, Super Micro is reliant on its suppliers, including Nvidia, to maximize its AI opportunity. With orders for Nvidia’s AI-GPUs backlogged, there’s a real possibility of Super Micro Computer falling short of its full potential.
The second high-flying stock-split stock that smart investors should avoid in November, and arguably well beyond, is AI enterprise analytics software provider MicroStrategy(NASDAQ: MSTR). MicroStrategy’s board announced a historic 10-for-1 forward split in July, which was executed following the close of trading on August 7.
Though MicroStrategy’s core revenue driver for decades has been its software division, the bulk of its $50 billion market cap is tied to its Bitcoin(CRYPTO: BTC) holdings. As of Sept. 20, it held 252,220 Bitcoin, which accounts for 1.2% of all tokens that’ll ever be mined. However, there are three glaring flaws with MicroStrategy’s operating approach that simply can’t be ignored.
The primary reason MicroStrategy can be avoided is the unjustifiable valuation premium of its Bitcoin portfolio. As of this writing in the late evening on Oct. 31, a single Bitcoin was tipping the scales at $69,362, which puts the value of MicroStrategy’s crypto assets at $17.56 billion. But Wall Street is currently valuing the company’s Bitcoin at $49 billion (generously assuming a $1 billion valuation for the company’s software division). There’s absolutely nothing that justifies paying a 179% premium to the current price of Bitcoin.
Secondly, MicroStrategy’s method of acquiring Bitcoin is, in my view, incredibly dangerous. It’s been funding these purchases through convertible-debt offerings. Though the company expects its annual interest expense on its more than $4.2 billion in aggregate debt to come to only $34.6 million, it’s burned through $35.7 million in cash from its operating activities through the first nine months of 2024. There are serious questions about MicroStrategy’s ability to service its debt.
To build on this point, MicroStrategy laid out a plan to raise (I hope you’re sitting down for this) $42 billion in capital over the next three years to purchase Bitcoin. It plans to issue $21 billion worth of its stock via ongoing at-the-market offerings, which would dilute existing shareholders, as well as $21 billion in fixed-income securities.
The icing on the cake is that MicroStrategy’s only source of operating cash flow — its AI enterprise analytics software segment — has seen its sales decline by double digits over the last decade.
MicroStrategy has all the hallmarks of a bubble that’s eventually going to pop.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Bitcoin, Nvidia, and Walmart. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
