Currently, Wall Street appears to have a strong interest in two things: anything related to machine learning and businesses that are implementing stock splits. What many people may not be aware of is that these two movements are converging for a group of three companies.
A stock split Stock splits are a strategy used by publicly traded companies to adjust their share price and the total number of shares available. It’s important to note that these adjustments are only cosmetic and do not impact the company’s market value or its fundamental financial performance.
There are two types of stock splits: forward, which decreases the share price, and reverse, which increases the share price. Investors typically show more interest in companies that undergo forward-stock splits. Companies that opt for forward splits are usually performing well and staying ahead of the competition through innovation and strong execution. On the other hand, publicly traded companies that choose reverse-stock splits are generally not in a position of operational strength.
During the past six months, 13 well-known companies have declared or executed a stock split, There was only one that did not belong to the forward-split category. Three stocks that have already split or are planning to split belong to companies at the forefront of the artificial intelligence revolution.
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Nvidia, Broadcom, and Super Micro Computer have announced significant stock splits in their respective histories.
The anticipation over the growth of AI is evident. PwC analysts predict that AI will contribute $15.7 trillion to the worldwide economy by the end of the decade. This substantial market opportunity indicates that there could be numerous significant beneficiaries due to this advancement in technology.
Hardware leader on May 22 Nvidia ( NVDA -1.47% ) got things started by announcing a forward split at a ratio of 10 new shares for every 1 existing share After experiencing its biggest forward split ever, Nvidia’s stock reached a market capitalization of $3.46 trillion shortly after the split was implemented on June 7th. This briefly positioned Nvidia as the most valuable publicly traded company globally.
The Nvidia H100 GPU has established itself as the go-to choice for high-performance data centers aiming to train extensive language models and operate generative AI solutions. Dominance in the market for the technology that powers AI-enhanced data centers. Nvidia’s stock has been driven up by a combination of strong pricing power and the scarcity of AI-GPUs.
Specialist in artificial intelligence networking Broadcom ( AVGO -0.75% ) was the next in queue to become a part of the stock-split group known as the “Class of 2024,” as decided by the company’s board. On June 12, the company authorized its first-ever 10-for-1 stock split. , starting from the end of the business day on July 12th.
Broadcom’s networking solutions, such as the Jericho3-AI fabric, are well-known for linking numerous AI-GPUs in corporate data centers to minimize delays and maximize the computing power of these chips. Essentially, Broadcom is aiding in accelerating the quick decision-making required by AI-based software and systems.
Finally, a specialist in customizable rack servers and storage solutions. Super Micro Computer refers to a high-performance computer system developed by the company Super Micro Computer Inc. ( SMCI -3.15% ) The club made an announcement about their inaugural stock split when they joined. On August 6, a 10-for-1 stock split was announced, and it will be implemented after the market closes on September 30.
There is a strong demand for Super Micro’s server solutions as companies expand their physical infrastructure for training large language models, running generative AI applications, speeding up quantum computing, and other tasks. Super Micro’s sales more than doubled in fiscal 2024, reaching $14.94 billion by June 30. Analysts predict that the company will achieve a sales growth of 75% or more, exceeding $26 billion in the current fiscal year.
Out of these three AI stock-split stocks, two are not recommended for purchase.
However, not all prominent companies in the AI sector that are experiencing euphoria from stock splits are necessarily good investments.
The stark truth about groundbreaking innovations that follow. They have a track record of letdowns. In the past thirty years, every exciting new idea, technology, or trend that attracted investors with promises of high profits eventually experienced an early stage bubble.
Bubbles often emerge on Wall Street when new technologies or trends emerge because investors tend to overestimate the speed at which these innovations will be embraced and put to use. Both professional and retail investors are typically too optimistic and neglect to consider that innovations require time to develop and establish themselves.
One clear indicator that artificial intelligence is not yet a fully developed technology is the absence of specific strategies presented by tech companies on how they intend to leverage AI to boost their revenue and enhance their financial performance. Although a few companies may have general expectations outlined, most businesses do not have a comprehensive plan for utilizing AI. practically guarantees that the AI bubble will eventually collapse at a later date.
If history proves to be correct and the AI bubble bursts, Nvidia would be the most severely affected company. The majority of its increased value and recent sales growth can be attributed to the popularity of its AI hardware and the scarcity of AI-GPUs. It is anticipated that this scarcity will decrease eventually, which will have an impact on Nvidia’s performance. Competition, both from within the organization and externally, is increasing for space within data centers. Nvidia’s share price might have experienced a rise. long way to fall.
Super Micro Computer is facing a similar situation. The majority of its recent increase in sales is due to companies expanding their data centers. If the AI market crashes or if businesses realize they are unable to generate a profitable return on their AI investments, Super Micro’s upcoming server orders and its stock value will be negatively impacted.
To add, Super Micro’s rack servers feature Nvidia’s top-of-the-line H100 GPUs. If the supply issues continue, there is a growing risk that Super Micro may not reach its full potential due to the backlog.
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Currently, this AI stock-split stock is the only one worth considering for purchase.
Within the trio of AI stock-split stocks on Wall Street, Broadcom stands out as an excellent investment choice. .
Broadcom experienced significant advantages from the rising demand for its AI-powered networking products. However, even before artificial intelligence became a major trend on Wall Street, the company already had a wide range of revenue sources and a substantial backlog.
For example, Broadcom is a top company in the industry that supplies wireless chips. Next-generation smartphones are incorporating advanced technology, including various components, to enhance user experience. The investment made by telecom companies to improve their wireless infrastructure for faster 5G data speeds has led to an extended cycle of device upgrades, increasing the need for Broadcom’s wireless products.
Broadcom is involved in various industries aside from smartphones. It offers financial services software, cybersecurity solutions, and optical products for next-generation vehicles and industrial equipment.
The management team at Broadcom also consists of… Utilized purchasing of other companies as a method to grow the range of products and services offered by the company. Broadcom aims to enhance its profitability by acquiring Symantec, a cybersecurity solutions provider in 2019, and by finalizing a $69 billion agreement to buy VMware in November 2023. The purchase of VMware is crucial for advancing Broadcom’s goal of assisting companies in addressing the complexities of tailoring private, hybrid, and multi-cloud settings.
The main idea to emphasize is that if the AI bubble were to burst, it would not have as drastic of an impact on Broadcom compared to Nvidia and Super Micro Computer. Although Broadcom would likely experience a decrease in AI networking sales, its other sales channels would remain largely unaffected.
At 24 times earnings projected for the upcoming year Broadcom may not be as undervalued as it was two years ago, but its projected annual earnings per share growth of 18% over the next five years suggests potential for its valuation to increase.
