Many popular tech stocks split their shares over the past two years. Stock splits don't actually make a stock fundamentally cheaper, since they merely cut a single share into smaller slices to reduce the trading price.
Yet stock splits generate lots of media buzz and attract smaller investors who don't want to pay hundreds or thousands of dollars for a single share of a hot company. Stock splits also make it cheaper to trade options, since a single contract is still tethered to 100 shares, and they allow companies to offer their employees more flexible stock-based compensation plans.
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Therefore, investors should still pay attention to which hot tech stocks might split in the future. I think these three companies might be ripe for stock splits: MercadoLibre(NASDAQ: MELI), ASML(NASDAQ: ASML), and Salesforce(NYSE: CRM).
1. MercadoLibre
MercadoLibre, the largest e-commerce company in Latin America, went public at $18 in 2007 and now trades at about $2,040. But even after turning a $1,000 investment into more than $113,000, it's still never split its high-flying stock.
From 2007 to 2023, MercadoLibre's revenue rose at a compound annual growth rate (CAGR) of 38%. That robust growth was driven by its expansion across 18 countries, rising internet penetration rates across Latin America, and the stickiness of its Mercado Pago ecosystem of digital payment and fintech services. It also built a massive logistics network before many of its domestic and overseas competitors, and its profitability improved as economies of scale kicked in and diluted its expenses.
From 2023 to 2026, analysts expect MercadoLibre's revenue to grow at a CAGR of 27% as its earnings per share (EPS) increases at a CAGR of 51%. Those are incredible growth rates for a stock that trades at 41 times next year's earnings.
MercadoLibre's stock could head a lot higher on its own over the next few years, but a stock split might draw in a fresh generation of retail investors who were initially driven away by its four-digit trading price.
2. ASML
ASML, the world's leading producer of lithography systems for manufacturing semiconductors, has implemented four stock splits since its IPO in 1995. It executed two 2-for-1 splits in 1997 and 1998, a 3-for-1 split in 2000, and an 8-for-9 reverse split aimed at optimizing its capital structure in 2007. It's soared from its split-adjusted initial public offering (IPO) price of $1.85 to $834 today, so a $1,000 investment would have blossomed to more than $450,000.
From 1996 to 2023, ASML's revenue grew at a CAGR of 15%. Its growth was initially driven by its dominance of the market for deep ultraviolet (DUV) lithography systems, which are used to optically etch circuit patterns onto silicon wafers. It subsequently became the only manufacturer of extreme ultraviolet (EUV) lithography systems, which are required to produce the world's smallest and densest chips. As a result, all of the world's most advanced chip foundries -- including Taiwan Semiconductor Manufacturing Company, Samsung, and Intel -- use ASML's EUV systems to produce their most advanced chips.
From 2023 to 2026, analysts expect ASML's revenue to rise at a CAGR of 13% and its EPS to grow at a CAGR of 19%. Tighter export curbs are throttling its sales of advanced systems to China, but the gradual rollout of its next-gen "high-NA" EUV systems should offset that pressure. Its stock still looks reasonably valued at 26 times next year's earnings, but a split could bring its trading price back to the double-digits again and make it more appealing to new investors.
3. Salesforce
Salesforce, the world's largest provider of cloud-based customer relationship management (CRM) services, went public at a split-adjusted price of $2.75 per share in 2004. At its current price of $290, a $1,000 investment in its IPO would be worth more than $105,000 today. It underwent a single 4-for-1 stock split in 2013.
From fiscal 2004 to fiscal 2024 (which ended in January 2024), Salesforce's revenue rose at a CAGR of 35%. It grew rapidly as more companies replaced their desktop-based CRM software with its cloud-based CRM services. It also expanded its cloud ecosystem with more marketing, analytics, e-commerce, and collaboration services.
However, Salesforce's growth has slowed down over the past few years as the CRM market matured and it faced tougher macro and competitive headwinds. Activist pressure also forced it to focus on cutting costs instead of making big acquisitions to inorganically boost its revenues. From fiscal 2024 to fiscal 2027, analysts only expect its revenue to grow at a CAGR of 9% -- but they expect its EPS to increase at a CAGR of 27% as it streamlines its spending.
Salesforce's stock looks historically cheap at 26 times its forward adjusted earnings, and it even declared its first dividend earlier this year. But a split might make its stock, which has slipped about 3% over the past six months, a bit more appealing.
Should you invest $1,000 in MercadoLibre right now?
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Leo Sun has positions in ASML and MercadoLibre. The Motley Fool has positions in and recommends ASML, MercadoLibre, Salesforce, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
