This has been nothing short of a phenomenal year for Wall Street and the investing community. The ageless Dow Jones Industrial Average, benchmark S&P 500, and growth stock-focused Nasdaq Composite have respectively delivered gains of 19%, 26%, and 27%, as of the closing bell on Nov. 27, as well as hit multiple record-closing highs.
While the artificial intelligence (AI) revolution has been undeniably important in lifting the broader market, it would be unwise to ignore the role stock-split euphoria has played in pushing a number of market-leading businesses higher this year.
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A stock split is a tool publicly traded companies can use to cosmetically adjust their share price and outstanding share count by the same magnitude. These changes are “cosmetic” in the sense that adjusting a company’s share price and share count doesn’t impact its market cap or underlying operating performance.
Stock splits come in two varieties, with investors flocking to one far more than the other. The less-popular of the two is reverse splits, which are designed to increase a company’s share price, often with the purpose of ensuring continued listing on a major stock exchange. This type of split is usually conducted by struggling businesses and requires a lot of extra vetting on the part of investors.
By comparison, investors gravitate to companies executing forward stock splits. A forward split is angled at making a company’s shares more nominally affordable for retail investors and/or employees who lack access to fractional-share purchases with their broker. This type of split is almost always undertaken by companies that are handily outperforming and out-innovating their competition.
Since 2024 began, more than a dozen prominent businesses have announced or completed a stock split, all but one of which is of the forward variety. However, the outlooks for these companies meaningfully differs.
As we move into December and prepare to turn the page on 2024, one historically cheap stock-split stock is begging to be bought hand over fist, while another formerly high-flying AI stock is worth avoiding.
Despite more than a dozen forward stock splits occurring this year, the most-attractive of all splits in December is the lone brand-name company that conducted a reverse split. I’m talking about satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI).
What makes Sirius XM’s stock split so unique is that it was in no danger of having its stock delisted when it completed a 1-for-10 share consolidation following the close of trading on Sept. 9. Rather, the move was almost certainly made to put Sirius XM stock back on the radars of Wall Street’s top money managers. Some institutional investors won’t buy stocks that trade below $5 per share. Sirius XM’s 1-for-10 reverse split resolved this minor issue.
In addition to conducting a historic split, Sirius XM also merged with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. Though Liberty Media has been a majority stakeholder in Sirius XM, its tracking shares never did a particularly good job of matching the performance of Sirius XM stock. Merging these tracking shares with Sirius XM created a single class of common stock that removed any confusion and arbitrage from the equation.
But enough about logistics. Let’s get into the nitty-gritty of why Sirius XM makes for a stock investors can comfortably buy hand over fist right now.
To start with, it’s a legal monopoly. While Sirius XM continues to face competition for listeners from terrestrial and online radio providers, it’s the only licensed satellite-radio operator. Having a sustainable moat affords the company exceptional subscription pricing power, which it’s leaned on to stay ahead of the inflationary curve.
Another clear-cut competitive edge for Sirius XM is its revenue diversity. Whereas traditional radio operators bring in most of their sales from advertising, Sirius XM generated 76.5% of its net sales from subscriptions through the first nine months of 2024. Subscription revenue tends to be more predictable than advertising, which means Sirius XM is better positioned to contend with inevitable economic downturns than terrestrial and online radio providers.
Additionally, Sirius XM has enjoyed some degree of cost predictability that traditional radio operators lack. For example, transmission and equipment costs aren’t going to change much, if at all, no matter how many subscribers the company has.
Last but most certainly not least, Sirius XM stock is historically cheap and yielding north of 4%. Shares can be gobbled up by opportunistic investors for just 8 times forward-year earnings, which represents a 50% discount to the company’s average forward price-to-earnings (P/E) ratio over the trailing-five-year period.
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However, not every stock-split stock is going to be a winner. Although a very strong argument can be made that MicroStrategy is the stock-split stock to avoid in December (and going forward), I’ve chosen to highlight an equally polarizing company with a clouded outlook. Investors, say hello to customizable rack server and storage solutions specialist Super Micro Computer(NASDAQ: SMCI).
As recently as February 2023, shares of Super Micro could be purchased by investors for a pre-split price of around $80. But in March of this year, Super Micro’s stock catapulted to north of $1,200 per share, which eventually coerced the company’s board of directors to approve its first-ever split (10-for-1), which took place following the close of trading on Sept. 30.
On paper, Super Micro Computer finds itself perfectly positioned to take advantage of the rise of AI. Businesses wanting to be on the cutting edge of AI innovation are aggressively investing in the data center infrastructure that’s necessary to make this happen. According to the company, fiscal 2024 sales skyrocketed by 110% to $14.94 billion — Super Micro’s fiscal year ends on June 30. Further, Wall Street’s consensus calls for sales to climb by another 67% to approximately $25 billion in fiscal 2025.
To add fuel to the fire, Super Micro has been incorporating Nvidia‘s graphics processing units (GPUs) into its rack servers for AI-accelerated data centers. Nvidia’s GPUs are superior from a computing perspective, and businesses are lining up to purchase Super Micro’s data center infrastructure that incorporates this leading hardware.
While certain aspects of Super Micro Computer’s business are clicking, there are three big reasons investors would be wise to keep their distance.
The most glaring flaw of all with Super Micro is the uncertainty surrounding its financial statements and its continued listing on the Nasdaq exchange. In late August, short-seller Hindenburg Research released a report that alleged “accounting manipulation” at Super Micro. Since this report was issued, the company has delayed its annual filing and seen its previous auditor, Ernst & Young, resign. What’s more, it’s had to file a plan with the Nasdaq to (hopefully) keep its stock from being delisted.
Secondly, Super Micro finds itself at the mercy of its suppliers. With orders for Nvidia’s H100 GPUs backlogged, Super Micro runs the risk of not being able to satisfy orders for its own customers.
The third issue is that every next-big-thing innovation for 30 years, dating back to the advent of the internet, has navigated its way through an early stage bubble. Investors consistently overestimate how quickly a new technology or innovation will be adopted and gain utility, and there’s nothing to suggest that artificial intelligence is going to be an exception. If the AI bubble were to burst, orders for Super Micro’s data center infrastructure could quickly dry up.
While Super Micro Computer stock is likely to remain volatile for the foreseeable future, it should remain off-limits for investors until its accounting questions are concretely answered.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
