Although artificial intelligence (AI) is currently the hottest thing since sliced bread on Wall Street, the euphoria surrounding stock splits isn't too far behind.
A stock split is an event that allows a publicly traded company to alter its share price and outstanding share count by the same magnitude. These changes are purely cosmetic in the sense that stock splits have no impact on a company's market cap or its underlying operating performance.
Stock splits can go in either direction: forward or reverse. With a reverse-stock split, a company is purposely increasing its share price. This is often done to meet the continued minimum listing standards for a major stock exchange. Meanwhile, a forward-stock split is undertaken to make a company's shares more nominally affordable for retail investors who might not have access to fractional-share purchases with their broker. Since forward splits are completed from a position of strength, they tend to be the type of split investors gravitate to.
Image source: Getty Images.
Over the last six months, 12 prominent companies have announced and/or completed a stock split, only one of which was of the reverse-split variety.
While most Wall Street pundits (analysts, money managers, and economists) expect these one dozen stock-split stocks to head higher, this feeling of optimism isn't unanimous. Based on the prognostications of select Wall Street pundits, three stock-split stocks could plunge by as much as 98%!
Nvidia: Implied downside of 98%
The first stock-split stock that could absolutely crash through the floorboard, based on the forecast of one Wall Street figure, is the hardware kingpin of the AI revolution, Nvidia(NASDAQ: NVDA). Nvidia completed its historic 10-for-1 forward split after the closing bell on June 7.
Financial writer, economist, and founder of HS Dent Investment Management, Harry Dent, told Fox News Digital in June that Wall Street may be facing a bigger bubble than what occurred during the Great Depression. Dent pointed to the length of the current bubble (14 years), and the government stimulus that's fueled this rally, as his reasoning why the benchmark S&P 500 could plunge 86% and Nvidia could collapse by 98%!
While I don't share Dent's overly pessimistic forecast of a 98% decline for Nvidia, I am in agreement that the table is set for Wall Street's preeminent AI stock to fall off of the proverbial cliff sooner, rather than later.
Although history doesn't repeat to a "t" on Wall Street, it does have a tendency to rhyme. Looking back 30 years, there hasn't been a hyped innovation, technology, or trend that's managed to avoid an early innings bubble. This is to say that every new technology needs time to mature; and investors have a terrible habit of overestimating how quickly this happens. With most businesses currently lacking a clear game plan for how they're going to deploy AI solutions and grow their bottom lines, it looks to be just a matter of time before the AI bubble pops.
To be clear, I'm not suggesting that AI can't be a game-changer over the long run. Rather, I'm letting history do the talking for me and pointing out that it takes time for next-big-thing trends to find their footing.
Competition is going to be another problem. Even though Nvidia's AI-graphics processing units (GPUs) possess clear-cut compute advantages over its rivals, it's nowhere close to meeting enterprise demand. External competitors rolling out AI-GPUs shouldn't have any trouble grabbing market share from Nvidia.
Likewise, Nvidia is liable to lose valuable data center space with its top customers developing AI chips of their own. Long story short, Nvidia's adjusted gross margin and GPU pricing power have likely peaked, which spells trouble for the company's stock.
Image source: Getty Images.
MicroStrategy: Implied downside of 87%
A second stock-split stock that has the potential to plummet, based on the price target on one Wall Street analyst, is AI-inspired enterprise analytics software company MicroStrategy(NASDAQ: MSTR). MicroStrategy's 10-for-1 forward split will become effective as of the close of trading on August 7.
Almost a year ago to today, Jefferies analyst Brent Thill reiterated an underperform rating and lowly $210 price target for MicroStrategy. With shares of the company now north of $1,600, Thill's forecast would imply a whopping 87% retracement.
Though it's technically a software company, MicroStrategy is best-known for its leveraged bet on Bitcoin(CRYPTO: BTC), the world's largest cryptocurrency by market cap. As of June 20, it held 226,331 Bitcoins, which works out to more than 1% of the 21 million tokens that'll ever be mined. With Bitcoin valued at $64,101 per token, as of this writing, MicroStrategy's crypto assets are worth about $14.5 billion.
Herein lies the problem.
MicroStrategy ended July with a market cap of almost $29 billion. Backing out its software business, which has seen sales decline by 14% over the last decade, investors are placing a valuation on its Bitcoin assets of between $27 billion and $28 billion. Instead of just purchasing Bitcoin for around $64,100 on a cryptocurrency exchange, investors are buying shares of MicroStrategy and paying closer to $120,000 per Bitcoin. This excessive valuation premium makes no sense.
Worse yet, MicroStrategy has been financing its Bitcoin purchases with convertible-debt offerings. This strategy works great during crypto bull markets, but could very easily come back to haunt the company when digital currencies enter a steep bear market, which cryptocurrencies are known for.
The icing on the cake is that Bitcoin's network is inferior to other blockchain projects, in terms of processing speed and cost. With Bitcoin's first-mover advantages dissipating, MicroStrategy could easily lose its luster.
Cintas: Implied downside of 23%
The third stock-split stock that's poised to plunge, based on the price target forecast of one Wall Street pundit, is corporate identity uniforms provider Cintas(NASDAQ: CTAS). Cintas is on track to complete a 4-for-1 forward split on September 11.
Wall Street's primary Cintas bear is Citigroup analyst Leo Carrington. Carrington has a sell rating on the company, to go along with a $590 price target, which implies 23% downside from where shares ended on July 31.
Though Carrington acknowledged in a research note that the company's increased use of technology has driven operating efficiencies, he and his firm believe Cintas is already more-than-fully valued.
The big concern for Cintas is that it's a cyclical business. Although economic expansions last considerably longer than recessions, certain factors suggest that a sizable downturn for the U.S. economy may be on the horizon. These factors include the first notable decline in U.S. M2 money supply since the Great Depression, the longest yield-curve inversion in history, and one of the priciest valuations for the stock market, when back-tested to the early 1870s. If a recession were to arrive, companies with premium valuations would likely be the hardest hit.
Speaking of valuation, Cintas is currently trading at a multiple of nearly 46 times consensus earnings per share for fiscal 2025, which will end on May 31, 2025. Despite receiving a hearty boost from acquisitions and various operating efficiency improvements, an organic sales growth rate of 7.5% simply doesn't pass muster for a price-to-earnings multiple of almost 46.
The reason Cintas is unlikely to plunge as much as Nvidia or MicroStrategy is because of its hearty capital-return program. On July 23, Cintas announced a 15.6% increase to its quarterly cash dividend -- the 41st consecutive year Cintas has increased its payout -- as well as a $1 billion share repurchase program.
Unlike Harry Dent's overly pessimistic price target for Nvidia, Leo Carrington's $590 bullseye for Cintas is reasonable given the company's lofty premium and the economic challenges that may lie ahead.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Jefferies Financial Group, and Nvidia. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.
