Volatility is a given when you invest money on Wall Street. Since the start of this decade, all three major stock indexes have bounced back and forth between consecutive bear and bull markets. While most investors probably expect this pattern to end in 2024, it still speaks to the unpredictable nature of stocks in the short term.
Historically, when volatility and uncertainty rise, professional and retail investors tend to look for companies that consistently outperform in virtually any economic climate. One case in point is investors who have flocked to FAANG stocks for more than a decade. However, in recent years, the stocks that have received the most attention are those that have undergone stock splits.
Image source: Getty Images.
A “stock split” is a purely cosmetic event that allows a listed company to change its stock price and number of shares outstanding. This is superficial in the sense that a stock split does not change a company’s market capitalization or performance.
Forward stock splits can nominally make stocks more affordable for retail investors who cannot buy fractional shares from their brokers. Conversely, a reverse stock split aims to increase a company’s stock price and ensure its continued listing on a major stock exchange. With a few exceptions, investors tend to focus on high-performing companies with forward stock splits.
Since mid-2021, nearly a dozen well-known companies have implemented forward splits.
Companies that implement stock splits are typically more profitable and at the forefront of the innovation curve within their respective industries.
Since mid-2021, more than a dozen notable companies have completed forward stock splits. Amazon (AMZN 1.28%), tesla (TSLA 2.53%)and walmart (WMT 0.62%). Amazon and Tesla implemented forward stock splits of 20-1 and 3-for-1 in 2022, respectively, while Walmart’s 3-for-1 forward stock split went into effect last month.
AMZN data by YCharts.
The reason these businesses outperform is due to clearly defined competitive advantages.
- Amazon is an absolute giant in e-commerce. The company’s share of U.S. online retail sales in 2023 was nearly 38%, nearly six times that of its next closest competitor, Walmart. Amazon is also the parent company of Amazon Web Services (AWS), the world’s leading cloud infrastructure services platform.
- Tesla is North America’s leading electric vehicle (EV) manufacturer and the only pure EV manufacturer with recurring profits. Last year, Tesla produced just under 1.85 million EVs, but this year it is expected to exceed 2 million.
- Walmart was able to use its size to its advantage. Purchasing our products in bulk reduces our cost per unit, making our prices more competitive compared to most local stores and grocery chains. Meanwhile, the vastness of its stores and direct-to-consumer site encourages shoppers to stay within the company’s ecosystem of products and services.
On Tuesday, March 19th, another leading company announced it would be joining this exclusive split stock group.
Image source: Chipotle Mexican Grill.
Introducing Wall Street’s delicious new split stocks
After the closing bell on March 19, the fast-casual restaurant chain’s board of directors Chipotle Mexican Grill (CMG 3.48%) announced a 50-for-1 stock split, one of the largest forward splits in New York Stock Exchange history. Assuming the split is given the green light by shareholders at the company’s annual meeting in June, Chipotle will begin trading at the split price on June 26, 2024.
Chipotle went public in January 2006 at an initial price of $22 per share, but never split its stock. Immediately after the announcement, the company’s stock approached the $3,000 level. Based on trading conditions at the time of writing, a 50-for-1 stock split would reduce Chipotle’s stock price to nearly $60 per share.
Jack Hartung, Chipotle’s Chief Financial and Administrative Officer, said:
This is the first stock split in Chipotle’s 30-year history, and we believe it will make our stock more available to a broader range of investors, not just our employees. This split comes at a time when our stock is at an all-time high driven by record revenues, profits and growth.
Interestingly, Chipotle’s desire to make stock nominally more affordable for employees is the same as what Walmart said when it announced a 3-for-1 stock split in late January.
Chipotle’s continued performance that led to this monumental stock split can be summarized by three factors: food quality, menu, and innovation.
When it comes to the former, Chipotle has strived to use locally grown vegetables and responsibly raised meat. Just as grocery stores benefited from the organic food push 20 years ago, Chipotle enjoys exceptional pricing power and increased demand because of its fresh ingredients.
Second, Chipotle tends to keep its menu relatively small. A smaller menu makes it easier for staff to prepare meals and reduces service time. Even limited menus get even more exciting when new foods are introduced.
Finally, innovation plays a key role in Chipotle stock’s outperformance. A great example of this is the introduction of Chipotlane, a drive-through lane designed specifically for mobile ordering. Management has done a tremendous job of improving the operational efficiency of the store over time.
This Soaring Artificial Intelligence (AI) Stock Could Split Next
With Walmart completing its split in late February and Chipotle Mexican Grill set to conduct its first-ever split in late June, another blue-chip company joins this club of exclusive stock splits. It’s just a matter of time.Given the current buzz around artificial intelligence (AI), the most likely candidate to follow in Chipotle’s footsteps is a semiconductor company broadcom (AVGO 3.51%). Did you think I would say that? Nvidia?
Broadcom stock closed on March 19th at a whopping $1,238 per share. This number increased by more than 1,800% in his 10 years of this ordeal. Broadcom conducted three stock splits before being acquired by Avago in early 2016 (Avago chose to keep the Broadcom name), but Avago announced a stock split. I didn’t.
AI is a megatrend unlike anything we’ve seen since the advent of the internet. PwC researchers released a report last year suggesting that AI could add $15.7 trillion to global gross domestic product by 2030, although estimates vary. That’s music to Broadcom’s ears.
Broadcom’s performance could be fueled by the Jericho3-AI chip it introduced last spring. Jericho3 has the ability to connect up to 32,000 graphics processing units simultaneously in an AI-powered data center. In other words, Broadcom boasts the critical infrastructure needed to support generative AI solutions and large-scale language model training.
In addition to its undeniable AI connections, Broadcom’s high revenue base is its wireless chip segment. The company is a leading provider of his 5G wireless chips used in next-generation smartphones. Broadcom’s backlog is growing at a healthy pace as more and more consumers steadily upgrade their wireless devices to take advantage of faster download speeds.
Although Avago’s management has never triggered a stock split, a stock price above $1,200 is the catalyst needed to make the company’s stock nominally more affordable to retail investors. there is a possibility.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Sean Williams has a position at Amazon. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, Nvidia, Tesla, and Walmart. The Motley Fool recommends his Broadcom. The Motley Fool has a disclosure policy.
