Artificial intelligence (AI) stocks have been hot for two years. Some have done so well that the companies have split their shares to make it easier for investors to continue buying shares. Chip companies, for example Nvidia And Broadcom rose to between $900 and $1,500 per share before a 10-for-1 split was implemented earlier this year.
It is important to remember that stock splits reduce the stock price by proportionally increasing the number of shares. The fundamental value of the stock does not change because these cheaper shares represent less of the company. It is similar to cutting the same cake into smaller slices. The whole cake is still the same size.
Yet investors often love stock splits. Nvidia is up 45% since announcing its split in May, and Broadcom is up 20% since announcing its split in June. Which AI stock could be next? Here’s my prediction.
Social media giant Metaplatforms(NASDAQ: META) is perhaps the most likely candidate. If you follow the evidence, it just makes too much sense. For example, Meta’s share price has become increasingly difficult to afford for individual investors. The stock is trading at $575 per share, close to an all-time high of just over $600.
That’s not to say Meta is fundamentally expensive; on the contrary. The stock trades at a price-to-earnings ratio of 27, and analysts expect the company’s profits to grow an average of 19% per year over the next three to five years. At a price-to-earnings-growth ratio (PEG) of just 1.4, the valuation makes sense for growth, meaning the stock could realistically continue to appreciate over time.
But because the stock is worth nearly $600 per share, fewer investors can accumulate a meaningful number of shares. Buying just 10 shares means tying up almost $6,000 in capital, which can take a long time to save for many individual investors. A stock split would solve that problem.
Stock splits are not only in the interests of investors, but also of employees. Technology companies commonly issue shares to employees as part of their compensation. If someone has worked at a successful company for years, that stock can be worth a lot of money.
Employees looking to redeem certain shares may not want to sell them in increments of $600 or more per share; they may want more liquidity. Just look at the billions of dollars in shares Meta has issued over time:
META chart for stock-based compensation (TTM).
It’s worth noting that Meta has never conducted a stock split since its initial public offering (IPO) in 2012. Still, the stock has increased significantly in value from its IPO price of $38 per share. The higher the share price, the more long-time employees are likely to enjoy the flexibility a stock split would give them.
Perhaps the most underrated aspect of a stock split is the message it can send to the market. The whole point of a split is to attract buyers to the stock, but this must be done under the right circumstances.
Think again about Nvidia. The company’s stock has risen nearly 550% from the start of 2023 to when it announced the split on May 22, 2024. A stock doesn’t move like that unless everything goes well, making it easy for Nvidia to send a positive message with its stock. split. It was like saying, “Hey, we’re hitting it out of the park and we want more investors to join us!”
Messages are important. Think about a company like ASML Holding. It trades at a higher price than Meta today, but the company is facing recent setbacks. Shares are down more than 30% from their peak.
What kind of message does it send if a share is split when things are not going well? A negative or desperate message is unlikely to attract buyers; it’s more unpleasant than anything.
Shares of Meta Platforms are up more than 370% since January 2023 and are near all-time highs today. The numbers justify a stock split and the backdrop is perfect for sending a strong, positive message. It’s my prediction for the next AI stock split on Wall Street, and it’s the runaway favorite, if you ask me.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends ASML, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Prediction: This Artificial Intelligence (AI) stock is likely to split. It was originally published by The Motley Fool
