Wall Street’s two newest split stocks are in the spotlight this week

Although artificial intelligence (AI) has been the talk of Wall Street for much of the past two years, the euphoria surrounding companies doing stock splits has been an equally important catalyst for the stock market in 2024.

A stock split is a tool that publicly traded companies have at their disposal that allows them to cosmetically change their stock price and the number of shares outstanding by the same magnitude. It is cosmetic in that the stock split has no impact on a company’s market capitalization or underlying operating performance.

There are two classes of stock splits, one to which investors gravitate away more than the other. A reverse stock split is intended to increase the price of a company’s stock, often to secure its continued listing on a major stock exchange. Comparatively, forward-stock splits lower a company’s stock price, usually with the goal of making the stock more nominally affordable for retail investors and/or employees.

While reverse stock splits are typically conducted from a position of operational weakness, companies that perform forward splits typically outperform their competition and are on the leading edge of the innovation curve in their respective industries. In short, investors often turn to companies that complete stock splits on time.

Since the beginning of 2024, 13 exceptional businesses have announced or completed a stock split, of which 12 are forward-splits. Although none of them are probably better known than the AI ​​leaders Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO)attention this week turns to the two newest members of Wall Street’s stock-sharing club.

Nvidia and Broadcom were the most anticipated stock splits on Wall Street

The hype around AI is so strong that investors could cut it with a knife. Since the start of 2023, Nvidia shares have soared 639% since the closing bell on September 3, with Broadcom up 173%. Such monstrous earnings forced Nvidia to complete a 10-for-1 straight split in early June, while Broadcom conducted its first split, also of the 10-for-1 variety, in mid-July.

The fuel behind Nvidia’s epic run that saw it, at least briefly, become the largest publicly traded company is its top-of-the-line graphics processing units (GPUs). The company’s H100 GPU is the preferred choice in AI-accelerated data centers.

More importantly, demand for the H100 platform and successor Blackwell, due to debut in early 2025, is delayed. When the demand for a good easily exceeds its supply, the price of that good tends to rise. The H100 GPU typically costs 100% to 200% more than Advanced microdevicesMI300X AI-GPU. For Nvidia, this has led to a considerable increase in its gross margin since the beginning of 2023.

The story continues

As for Broadcom, it has become the preferred provider of AI network solutions. The Jericho3-AI fabric, which was introduced in the second quarter of 2023, is capable of connecting up to 32,000 GPUs in high-computing data centers. The goal of Broadcom’s solutions is to reduce end-to-end latency and help businesses get the most computing power out of their GPUs.

However, Broadcom has a considerably more diverse revenue stream than Nvidia. It is one of the leading suppliers of wireless chips and accessories used in 5G-enabled smartphones and offers a wide range of optical components and network solutions to industrial and automotive companies.

But Nvidia and Broadcom had their moment in the spotlight as split stocks. This week, two new companies are set to be in the spotlight.

Sirius XM Holdings

One of Wall Street’s newest stock splits and the only one of the 13 to complete a reverse split is the satellite radio operator. Sirius XM Holdings (NASDAQ: SIRI).

Sirius XM is the latest part of its merger with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group (NASDAQ: LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK)which is expected to cease trading after the closing bell on September 9. This merger is being undertaken to create a unified class of Sirius XM common stock.

Upon completion of this merger — i.e., after the close of trading on September 9 — Sirius XM will conduct a 1-for-10 reverse stock split.

While we’ve noted that reverse splits are typically done from a position of operational weakness, that’s not the case with Sirius XM, which is at risk of being delisted. The company has about 3.85 billion shares outstanding, which has kept its stock price firmly in the mid-single digits for over a decade. Some institutional investors may consider stocks with a low share price as too risky. This upcoming split, which will boost its stock price by a factor of 10, should put the company on the radar of bigger-money investors.

Despite no longer growing at a rapid pace, Sirius XM still enjoys a number of competitive advantages. For example, being the only licensed satellite radio operator gives the subscription a level of pricing power that virtually ensures it stays ahead of the inflation curve. With Spotify technology recently raised the cost of its subscription, Sirius XM looks like a good bet to follow suit and raise its prices in the coming months.

Sirius XM also generates its revenue in a significantly different way than traditional radio operators. While most terrestrial and online radio providers rely heavily on advertising revenue to keep the lights on, Sirius XM derived about 77% of its net sales in the first six months of 2024 from subscriptions.

While an ad-based operating model works well during long periods of economic expansion, it can lead to turmoil during the inevitable downturns in the US economy. Meanwhile, Sirius XM subscribers are far less likely to cancel their service than companies are to cut their marketing budgets when economic uncertainty rises. In short, Sirius XM has a safer floor than its peers.

Filmed

The other split stock that will take center stage this week is the corporate uniform and business services leader Filmed (NASDAQ: CTAS).

On May 2, the company’s board of directors approved a 4-for-1 stock split to take place after the close of trading on September 11. This will mark the sixth time Cintas has split its stock since its August 1983 initial public offering (IPO). With the company’s stock up nearly 84,000% since its IPO, or 124,800% including dividends, a stock split is much needed.

While supplying corporate uniforms and various business paraphernalia such as mats and safety kits is not an innovative operating model, Cintas is able to take advantage of the non-linear nature of the business cycle.

Since the end of World War II 79 years ago, only three of the 12 US recessions have reached the 12-month mark, none lasting longer than 18 months. On the other side of the coin, most economic expansions have remained for several years, including two periods of growth that exceeded the 10-year mark. Disproportionately long growth spurts favor companies like Cintas, which are tied to the health of the US economy.

Another reason for the almost parabolic rise of Cintas stock is the diversity of its customers. Cintas claims to serve more than 1 million businesses. This means that no one customer is vital to its success or able to capsize the proverbial ship.

Inorganic growth was another key catalyst for Cintas. Management has overseen a number of acquisitions since the turn of this century, including Zee Medical in 2015 and G&K Services in 2017. In addition to being profitable, these acquisitions have helped expand Cintas’ product ecosystem as well as promoted cross-selling opportunities .

This week it’s all about Sirius XM and Cintas.

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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia and Spotify Technology. The Motley Fool recommends Broadcom and Cintas. The Motley Fool has a disclosure policy.

Move Over, Nvidia and Broadcom: Wall Street’s 2 Newest Stock Splits in Focus This Week was originally published by The Motley Fool