Although Wall Street is firmly in the grasp of a bull market, this decade has been anything but predictable. Its first four years saw the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite trade off bear and bull markets in successive years.
When volatility and uncertainty arise on Wall Street, investors typically run for cover in time-tested businesses that offer a history of outperformance. The “FAANG stocks” are an example of a group of outperforming companies that investors have flocked to. But in recent years, it’s companies enacting stock splits that have garnered even more attention.
A “stock split” is nothing more than a cosmetic event that allows a publicly traded company to alter its share price and outstanding share count by the same magnitude. A stock split won’t have any effect on a company’s market cap or its operating performance.
Stock splits come in two forms: Forward and reverse. A forward-stock split’s purpose is to make shares more nominally affordable for everyday investors — especially those who might not have access to fractional-share purchasing with their broker. Comparatively, a reverse-stock split increases a publicly traded company’s share price to ensure that continued minimum listing standards are met.
Not to slight companies conducting reverse-stock splits, because there have been a couple of big winners over the long run, but most investors are rightly focused on businesses enacting forward-stock splits. Companies completing forward splits are typically out-innovating and out-executing their competition.
Since 2024 began, more than a half-dozen high-profile companies have announced or completed a forward-stock split. However, not all of these stock-split stocks have the same outlook.
Based on high-water price targets issued by select Wall Street analysts, the following three stock-split stocks offer as much as 30% upside over the next year.
Nvidia: Implied upside of 29%
The first stock-split stock that offers scorching-hot potential is none other than the infrastructure backbone of the artificial intelligence (AI) movement, Nvidia (NASDAQ: NVDA). Nvidia completed a 10-for-1 forward split this past Friday, June 7, and will begin trading at its split-adjusted price this morning (June 10).
The loftiest price target on shares of Nvidia comes courtesy of Bank of America Securities senior semiconductor analyst Vivek Arya. Arya and his team recently increased their firm’s price target on the AI titan from $1,320 to a Street-high $1,500 ($150 on a split-adjusted basis), which if accurate implies additional upside of 29% over the next year. It would also add another $840 billion to Nvidia’s valuation and lift its market cap to about $3.7 trillion.
Arya’s bullishness on Nvidia has to do with his and his team’s belief that Nvidia will benefit immensely as businesses shift their focus to AI-accelerated data centers. In a recent interview with Yahoo! Finance where Arya defended his $1,500 price target, he suggested that businesses could spend $250 billion to $500 billion annually on AI-accelerated data centers.
Nvidia is undeniably benefiting from the overwhelming demand for its high-compute H100 graphics processing units (GPUs). Nvidia’s superior chips account for around 90% of all GPUs currently deployed in AI-accelerated data centers, which handle the training of large language models and oversee generative AI solutions.
But as I opined last week, Wall Street’s hottest mega-cap stock may be peaking. Although it appears as if Nvidia can do no wrong, the company is set to face growing external and internal competition. With regard to the latter, Nvidia’s top four customers (constituting approximately 40% of its net sales) are all developing AI chips of their own. This makes it likely that we’re witnessing a peak in orders for Nvidia’s high-powered GPUs from America’s most influential businesses.
Furthermore, history is undefeated when it comes to next-big-thing innovations. Over the last 30 years, investors have consistently overestimated the uptake of new technologies and innovations. AI and Nvidia are unlikely to break this trend.
Sony Group: Implied upside of 26%
A second stock-split stock that can soar, based on the prediction of one Wall Street pundit, is consumer electronics company Sony Group (NYSE: SONY). Sony first announced its plan to conduct a 5-for-1 forward split on May 14. For the company’s U.S. American Depositary Receipts (ADRs), shares will begin trading at their split-adjusted price on Oct. 8, 2024.
Wall Street’s top Sony bull is Martin Yang of Oppenheimer. Yang expects shares of the Japanese-based electronics company to reach $108, which would imply upside of a cool 26% over the next year.
Aside from the positive connotations that have accompanied stock-split stocks in recent years, Yang’s optimism likely has to do with a combination of growth in Sony’s higher-margin gaming services, its sensor imaging segment, and its beefed-up capital-return program.
While sales of Sony’s PlayStation 5 gaming console have tapered a bit, which is to be expected after 3.5 years on retail shelves, the company is enjoying an uptick in PlayStation Plus subscription revenue. PlayStation Plus allows subscribers to game with their friends, and store their saved game data in the cloud.
Sony is also a notable supplier of image sensors in next-generation smartphones. The 5G revolution has encouraged an ongoing device replacement cycle, which has helped increase demand for Sony’s image sensors.
In addition to announcing a 5-for-1 stock split in May, the company’s board approved a share repurchase program that could total as many as 30 million shares (post-split). This would equate to almost 2.5% of its outstanding shares. For companies with steady or growing net income, buybacks can provide a modest boost to earnings per share (EPS).
Lam Research: Implied upside of 30%
But the “Class of 2024” stock-split stock that offers the most upside, based on a lofty price forecast from one Wall Street analyst, is semiconductor wafer fabrication equipment company Lam Research (NASDAQ: LRCX). Lam’s board approved a 10-for-1 forward split on May 21, with the company expected to trade at its split-adjusted price prior to the opening bell on Oct. 3, 2024.
Wall Street’s most optimistic analyst on Lam Research is Mark Lipacis, the senior managing director of semiconductor and capital equipment companies at Evercore ISI. In April, Lipacis placed a $1,200 price target on shares of Lam, which suggests shares could soar by as much as 30% over the coming year.
The most logical reason for investors to be optimistic about Lam Research is its artificial intelligence ties. The spending boom in AI is accelerating demand for the packaging of high-bandwidth memory (HBM), which is quickly becoming a staple in high-compute data centers. HBM enables faster data access with lower energy consumption. As Nvidia’s AI chips proliferate, it’s wafer fabrication companies like Lam Research that are reaping the reward.
Similar to Sony Group, Lam’s board of directors also recently announced a share repurchase program. The $10 billion its board authorized for buybacks could reduce Lam’s outstanding share count by more than 8% if fully executed at the current share price of nearly $923.
But there are also reasons to be skeptical of significant upside in a stock that’s already ascended to the heavens. For instance, U.S. regulators have clamped down on AI-focused wafer fabrication equipment exports to China. Reduced orders from the world’s No. 2 economy by gross domestic product put a very clear ceiling on Lam’s near-term growth potential.
I’ll also reiterate that history has been repeatedly unkind to next-big-thing trends. If investors, once more, overestimate the adoption of a new innovation, the businesses with the most direct AI ties, like Nvidia and Lam Research, will be hit the hardest.
A final reason to be skeptical of Lam reaching a $1,200 share price is its valuation. After trading at an average forward-year price-to-earnings (P/E) multiple of 17 over the last five years, Lam Research is currently commanding a forward P/E of closer to 26. It’s quite the premium for a notoriously cyclical company.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America, Lam Research, and Nvidia. The Motley Fool has a disclosure policy.
3 Stock-Split Stocks That Can Soar Up to 30%, According to Select Wall Street Analysts was originally published by The Motley Fool
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