Nvidia, Broadcom and Super Micro Computer have all announced 10-for-1 stock splits, but only one of these market leaders is worth investors' money.
Wall Street seems to be obsessed with two trends right now: artificial intelligence (AI) and companies doing stock splits. You may not have noticed, but these two trends are intersecting in three companies.
A stock split is a means by which publicly traded companies can change their stock price or the number of shares outstanding. Keep in mind that these changes are cosmetic and stock splits do not affect a company's market capitalization or its underlying financial performance.
There are two types of stock splits: forward (lowering the nominal share price) and reverse (increasing the nominal share price), and most investors tend to flock to companies that do forward stock splits. Fast-growing companies are more innovative and better able to execute than their competitors, so forward splits are almost always done from a position of strength. This is rarely the case for public companies that do reverse stock splits.
In the past six months, 13 major companies have announced or completed stock splits, all but one of which were forward splits. Three of these completed or scheduled stock splits are companies leading the artificial intelligence revolution.
Image source: Getty Images.
Nvidia, Broadcom and Supermicro Computer all announced historic stock splits.
The excitement around the rise of AI is palpable: According to analysts at PwC, AI is predicted to add $15.7 trillion in value to the global economy within 10 years. This massive market size suggests that this technological breakthrough has the potential to create several big winners.
On May 22, hardware leader Nvidia (NVDA 6.53%) kicked things off by announcing a 10-for-1 stock split, the largest stock split in the company's history. Immediately after the split went into effect after the close of trading on June 7, Nvidia's shares hit a market cap of $3.46 trillion, briefly making it the most valuable public company on the planet.
Nvidia's H100 Graphic Processing Units (GPUs) have become the standard for high-computing enterprise data centers looking to train large-scale language models (LLMs) and run generative AI solutions. Nvidia's market share dominance for the “brains” of AI-accelerated data centers, combined with the company's immense pricing power due to the shortage of AI-GPUs, has driven its stock price higher.
AI networking specialist Broadcom (AVGO 5.07%) is next up to join the “Class of 2024” stock split club. The company's board of directors approved a 1-for-10 split (the company's first) on June 12, to take effect at the close of business on July 12.
Broadcom's networking solutions (e.g. Jericho3-AI Fabric) are known for connecting large numbers of AI-GPUs in enterprise data centers, reducing tail latency and allowing companies to squeeze the most compute power out of these chips. In turn, Broadcom is helping to accelerate the split-second decisions required for AI-driven software and systems.
Finally, customizable rack server and storage specialist Supermicro Computer (SMCI 4.89%) also joined the club, announcing its first-ever stock split (10-for-1) on Aug. 6. The split will take effect after the close of trading on Sept. 30.
Demand for Super Micro's server solutions is growing as companies build the physical infrastructure needed to train law students, run generative AI solutions, accelerate quantum computing, and more. Super Micro is expected to more than double its revenue to $14.94 billion in fiscal 2024 (ending June 30), and analysts widely expect revenue to grow 75% this fiscal year to more than $26 billion.
Two of these three AI stock split stocks aren't worth buying
But despite the frenzy around splitting stocks, not all of the major companies involved in the AI revolution are worth buying.
The harsh reality of the next big thing innovation is that it has a history of disappointment: Over the past 30 years, every hyped innovation, technology, or trend that lured investors with big dollar signs ultimately succumbed to an early-stage bubble.
The reason we see bubbles constantly pop up on Wall Street when a new technology or trend emerges is because investors (both professional and retail) tend to overestimate how quickly a new innovation will be adopted and used. They are always too optimistic and fail to take into account that all innovations, technologies, and trends need time to mature.
One of the clear signs that artificial intelligence is far from being a mature technology is that technology companies have not yet laid out concrete plans on how they will use AI to grow revenue and increase profits. While some companies may have rough projections, the majority do not have a true AI strategy. This is why the AI bubble is bound to burst in the future.
If history is accurate and the AI bubble does burst, no company will be hit harder than Nvidia. The company's valuation rise and recent revenue growth have been driven in large part by a shortage of AI hardware and AI-GPUs. As external and internal competition for data center “real estate” intensifies, this shortage is expected to ease, but Nvidia's stock price could fall significantly.
Supermicro Computer is in a similar predicament: The company's recent surge in sales has come almost entirely from corporate data-center buildouts. If the AI bubble bursts or companies realize they don't understand how to make a profit from their AI investments, Supermicro's future server orders and stock price could take a hit.
Additionally, Super Micro's rack servers are outfitted with Nvidia's flagship H100 GPUs, which are currently backlogged, and the longer supply constraints persist, the more likely Super Micro will not be able to realize its potential.
Image source: Getty Images.
This is the only AI split stock worth buying right now
Of the three AI stock split stocks on Wall Street, Broadcom is the best one from an investment perspective.
To be sure, Broadcom is benefiting greatly from the growing demand for its AI-powered networking solutions, but the company had a huge order backlog and broad, diversified revenue streams even before artificial intelligence became the hottest topic on Wall Street.
For example, Broadcom is one of the leading providers of wireless chips and other accessories used in next-generation smartphones. Telecom companies are spending billions to upgrade their wireless networks to support 5G download speeds, driving multi-year device upgrade cycles and boosting demand for Broadcom's wireless solutions.
Broadcom has a reach beyond smartphones, offering financial services software, cybersecurity solutions and optical products used in next-generation vehicles and industrial equipment.
Broadcom's management has also used acquisitions as a way to expand the company's ecosystem of products and services and grow revenue, including its purchase of cybersecurity solutions provider Symantec in 2019 and its $69 billion acquisition of VMware in November 2023. The VMware acquisition is particularly important in advancing Broadcom's strategy to help companies overcome the challenges of customizing private, hybrid and multi-cloud environments.
The key takeaway here is that when the AI bubble bursts, Broadcom's world won't be turned upside down like Nvidia's or Super Micro Computer's: Broadcom's AI networking sales will almost certainly slow or shrink, but many of its other sales channels will be unaffected.
Broadcom is certainly not a bargain, trading at 24 times the earnings estimates from two years ago, but with earnings per share expected to grow 18% annually over the next five years, the valuation has room to expand.
