All clues point to this great company announcing its first-ever stock split.
Since the year began, the iconic Dow Jones Industrial Average, the benchmark S&P 500, and the innovation-driven Nasdaq Composite Index have all reached multiple closing highs. Excitement around artificial intelligence (AI) has played a key role in driving the overall market higher, but so too has the euphoria surrounding stock splits.
A stock split allows a listed company to adjust its stock price and number of outstanding shares without affecting its market capitalization or underlying business performance.
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There are two types of stock splits, and investors tend to gravitate toward one or the other.
The less popular of the two is the reverse stock split. This type of split is typically intended to increase a company’s stock price to ensure that the company continues to meet the minimum listing standards of major stock exchanges. Because reverse splits are often carried out by distressed companies, they usually require special scrutiny from investors.
On the other hand, investors will definitely flock to companies that complete their divestitures first. This is a type of split carried out by top companies that nominally makes their stock more affordable to retail investors who don’t have access to buying fractional shares through a broker. Over the past eight months, more than a dozen prominent companies have completed separations, with all but one being prospective separations.
Based on 12-month returns after stock split announcements, companies that implement stock splits have more than doubled the S&P 500’s stock price since 1980, according to a study by Bank of America Global Research. (25.4% for the split vs. 11.9% for the S&P). 500).
The relatively consistent outperformance of this stock split stock has investors eager to speculate on which prominent company will join this exclusive club next.
With earnings season in full swing, one of the market leaders is scheduled to report this week and appears poised to announce a future split.
Market leader could end October on a high note with first-ever stock split
Many industry leaders have revealed whether they did well or poorly last quarter, but one of the most notable is social media giant Metaplatform (META 0.86%). The company, the parent company of sites like Facebook, Instagram, WhatsApp, Facebook Messenger, and Threads, is scheduled to report its third-quarter results after the closing bell on Wednesday, October 30th.
One of the interesting things about Meta, one of the members of the Magnificent Seven, is that he has never split up. This is notable considering the company’s stock reached $600 on an intraday basis during October. Despite more online brokerages than ever allowing investors to buy fractional shares, Meta is a well-known company that has discouraged some individual investors from buying their own stock. There is a possibility that
Aside from stock prices hitting all-time highs in October, in recent memory, many of Wall Street’s top AI stocks have completed the following splits:
Looking a little broader, other major artificial intelligence companies, such as Amazon and Alphabet, which are members of the Magnificent Seven, will split their stocks in 2022.
It is almost expected that the rapidly rising AI stock will generate some buzz among investors through a stock split. Considering that Meta is spending over $10 billion to buy artificial intelligence GPUs from Nvidia for its data centers, it definitely qualifies as one of Wall Street’s top AI stocks. If the company announces its first-ever prospective split this week, it will undoubtedly be the most anticipated split of the fourth quarter.
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Don’t overlook the simple things. That’s what makes Meta a great investment.
Meta Platforms’ AI and Metaverse ambitions have driven the company’s stratospheric resurgence over the past two years, but it’s important for investors not to overlook the simple factors that have made it such a profitable business. That’s it.
For example, Meta attracted 3.27 billion daily active users to its family of apps during the quarter ending June. Companies are well aware that no other social media platform can attract as much attention as Meta, which gives them extraordinary ad pricing power.
With this in mind, Meta takes advantage of the non-linearity of economic cycles. Although recessions are normal and inevitable, the most important aspect of recessions is that they are short-lived. Of the 12 recessions that occurred in the United States after World War II, nine lasted less than 12 months, while the remaining three lasted no longer than 18 months.
Most growth periods span multiple years, allowing ad-driven businesses like Meta (which derives about 98% of its net sales from advertising) to grow.
Meta Platforms is also leveraging capital and generating tons of cash. Mark Zuckerberg’s company ended June with $58.1 billion in cash, cash equivalents and securities, and generated about $23.4 billion in free cash flow (FCF) through the first half of 2024. Importantly, unlike many other social media companies, this cash and FCF gives media companies the luxury of taking risks and being willing to innovate.
Finally, investors need to realize that the meta is still fairly cheap. The company’s stock is valued at 23 times estimated 2025 earnings per share (EPS), despite an increase of more than six times from its 2022 bear market lows. With sustained double-digit EPS growth expected over the next five years, the stock split is the icing on the cake.
Bank of America is an advertising partner of The Motley Fool’s Ascent. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Sean Williams has held positions at Alphabet, Amazon, Bank of America, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
