Despite all the attention artificial intelligence (AI) has garnered on Wall Street, it's stock-split euphoria that's been giving AI a run for its money in 2024.
A stock split marks an event that allows publicly traded companies to cosmetically alter their share price and outstanding share count. It's superficial in the sense that adjusting a company's share price and share count by the same magnitude has no impact on its market cap, and doesn't affect its underlying operating performance.
Splits comes in two varieties, with investors favoring one far more than the other. Reverse-stock splits are designed to increase a company's share price, usually with the goal of ensuring continued listing on a major stock exchange. Meanwhile, forward-stock splits reduce a company's nominal share price. The purpose of forward splits is to make shares more "affordable" for investors who lack access to fractional-share purchases with their broker.
Image source: Getty Images.
Since forward-stock splits are being conducted by high-flying companies that are almost always out-executing and out-innovating their peers, this is the type of split that investors favor.
Over the last six months, 13 high-profile companies have announced or completed a stock split, all but one of which is of the forward-split variety:
- Walmart(NYSE: WMT): 3-for-1 forward split
- Nvidia(NASDAQ: NVDA): 10-for-1 forward split
- Amphenol(NYSE: APH): 2-for-1 forward split
- Chipotle Mexican Grill(NYSE: CMG): 50-for-1 forward split
- Mitsui(OTC: MITSY)(OTC: MITSF): 2-for-1 forward split
- Williams-Sonoma(NYSE: WSM): 2-for-1 forward split
- Broadcom(NASDAQ: AVGO): 10-for-1 forward split
- MicroStrategy(NASDAQ: MSTR): 10-for-1 forward split
- Cintas(NASDAQ: CTAS): 4-for-1 forward split
- Sirius XM Holdings(NASDAQ: SIRI): 1-for-10 reverse split
- Super Micro Computer(NASDAQ: SMCI): 10-for-1 forward split
- Lam Research(NASDAQ: LRCX): 10-for-1 forward split
- Sony Group(NYSE: SONY): 5-for-1 forward split
Even though stock-split stocks have, since 1980, vastly outperformed the benchmark S&P 500 with regard to average annual return in the 12 months following their initial split announcement, billionaire money managers have mixed feelings about this bunch.
Based on the latest round of Form 13F filings -- these filings tell investors what prominent money managers bought and sold in the latest quarter -- two of these stock-split stocks were sent to the chopping block by billionaire investors, while shares of another were scooped up hand over fist.
Stock-split stock No. 1 top-tier billionaires are sending to the chopping block: Nvidia
The first stock-split stock that billionaire money managers have been actively showing to the door is the hardware kingpin of the AI revolution, Nvidia. The June-ended quarter represents the third consecutive quarter of significant selling activity by asset managers, with seven billionaires reducing their respective fund's stakes (total shares sold in parenthesis):
- Ken Griffin of Citadel Advisors (9,282,018 shares)
- David Tepper of Appaloosa (3,730,000 shares)
- Stanley Druckenmiller of Duquesne Family Office (1,545,370 shares)
- Cliff Asness of AQR Capital Management (1,360,215 shares)
- Israel Englander of Millennium Management (676,242 shares)
- Steven Cohen of Point72 Asset Management (409,042 shares)
- Philippe Laffont of Coatue Management (96,963 shares)
Although profit-taking may be playing a key role in this ongoing selling activity -- shares of Nvidia have increased by more than 700% since 2023 began -- it's just as likely that billionaire money managers are becoming concerned about competitive pressures and the role history has played with next-big-thing innovations.
Despite Nvidia maintaining a clear compute advantage with its graphics processing units (GPUs), compute advantage alone may not be enough to avoid losing market share and precious pricing power on its GPUs. With demand overwhelming supply, and Nvidia's production partially stymied by the capacity of its suppliers and design flaws for its next-gen Blackwell platform, external competitors like Advanced Micro Devices should have no trouble finding buyers for its chips.
I'll also add that all four of Nvidia's top customers, representing roughly 40% of its net sales, are internally developing AI-GPUs for their data centers. These complementary chips all but ensure reduced reliance on Nvidia's hardware in future years.
However, history might be the most damning concern of all. Every next-big-thing innovation over the last 30 years has endured a bubble-bursting event. Investors always overestimate the uptake and utility of new technologies, leading to eventual disappointment. When the euphoria surrounding AI fades, Nvidia's stock will likely be clobbered.
Image source: Getty Images.
Stock-split stock No. 2 successful billionaire asset managers are selling: Chipotle Mexican Grill
The second high-flying stock-split stock that billionaire investors dumped in droves during the second quarter is fast-casual restaurant chain Chipotle Mexican Grill. A trio of billionaires were sellers, including (total shares sold in parenthesis):
- Ken Griffin of Citadel Advisors (8,764,412 shares)
- Bill Ackman of Pershing Square Capital Management (8,384,035 shares)
- Ray Dalio of Bridgewater Associates (614,200 shares)
The noteworthy name here is Pershing Square's Bill Ackman, who's been a longtime holder of Chipotle's stock (since the third quarter of 2016).
In many ways, Chipotle has been firing on all cylinders. The company's use of responsibly raised meats and locally sourced vegetables (when possible) have resonated with consumers who desire higher-quality, non-frozen foods, and afforded Chipotle ample pricing power.
Additionally, the company's management team has remained disciplined in its approach to growth. By continuing to limit the size of the company's menu, Chipotle's staff is able to quickly prep food each day, as well as expedite lines in its restaurants.
So, why sell? The likeliest reason this trio of billionaires reduced their respective stakes has to do with Chipotle Mexican Grill's valuation. Although comparable restaurant sales growth of 7% in the first quarter and 11.1% in the second quarter is impressive for a chain the size of Chipotle, it doesn't quite justify a forward-earnings multiple of 40. There's only so much innovation that can be squeezed out of restaurant chains.
We also recently learned that Brian Niccol would depart as Chairman and CEO, effective Aug. 31, and slide into his new role as the CEO of coffee chain Starbucks. Given how successful Chipotle Mexican Grill has been since Niccol's arrival in March 2018, there's liable to be concern about the company's ability to innovate and execute going forward.
The stock-split stock prominent billionaire investors are buying hand over fist: Broadcom
On the other end of the spectrum is the one Class of 2024 stock-split stock that a half-dozen billionaire investors couldn't stop buying during the June-ended quarter. I'm talking about AI networking solutions specialist Broadcom (total shares purchased in parenthesis):
- Ole Andreas Halvorsen of Viking Global Investors (2,930,970 shares)
- Israel Englander of Millennium Management (2,096,440 shares)
- Ken Griffin of Citadel Advisors (1,880,740 shares)
- John Overdeck and David Siegel of Two Sigma Investments (1,332,230 shares)
- Ken Fisher of Fisher Asset Management (865,090 shares)
Similar to Nvidia, Broadcom's sails have been lifted by otherworldly demand for AI networking solutions. For instance, the company's Jericho3-AI fabric can connect up to 32,000 GPUs in high-compute data centers, thereby limiting tail latency and maximizing the compute ability of GPUs.
While this does mean Broadcom would have exposure to an AI bubble-bursting event, its sales channels are considerably more diverse than Nvidia.
As an example, Broadcom is one of the world's leading providers of wireless chips used in next-generation smartphones. Telecom companies spending big bucks to upgrade their networks to support 5G download speeds have led to sizable demand for next-generation wireless solutions amid a steady device replacement cycle.
Broadcom has also not been shy about using inorganic means to diversify its revenue stream. It acquired cybersecurity company Symantec in 2019, and more recently scooped up virtualization and cloud-computing software company VMware. The latter is to support Broadcom's efforts to be a major player in private and hybrid enterprise clouds.
Long story short, Broadcom is better positioned than most AI companies to navigate a bubble-bursting event, should one occur.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Advanced Micro Devices, Chipotle Mexican Grill, Lam Research, Nvidia, Starbucks, Walmart, and Williams-Sonoma. The Motley Fool recommends Broadcom and Cintas and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
