AI Prospects and Stock Splits Fuel Market Enthusiasm

Some savvy market watchers are all abuzz about the prospect of stock splits sending waves across the market in the latter half of this year, with enthusiasm focused on a few key shares. In addition, tech leader Intel saw a jump in price on Monday, 8 July, for a different reason. Without further ado, let’s dive into what lay behind the latest market shifts:

Splitting Up: Sometimes It's for the Best

Stock splits can be categorised into two primary forms: forward and reverse. A forward stock split aims to make shares more affordable for everyday investors who might not have access to fractional-share purchases through their broker. Conversely, a reverse stock split is typically implemented to increase a company's share price, ensuring it meets the minimum listing standards for significant stock exchanges.

While both types can result in long-term gains, many investors generally prefer forward stock splits. Companies executing forward splits are usually high-performing and characterised by innovation, thus making their shares more accessible to retail investors. Historically, these companies continue to grow in value. Firms that have conducted forward splits have consistently outperformed the broader market for over four decades. According to researchers, over the past four decades, companies announcing forward splits have averaged a return of more than 25% in the calendar year following the announcement. Following the split announcement since 1980. This performance significantly surpasses the S&P 500's average return of 11.9% during the same period.

Noteworthy Stock Splits in 2024

This year, the trend for major firms to split their stock has become more noticeable. In 2024, nearly a dozen prominent companies have announced stock splits. Nvidia (NVDA) is a prime example. Following a substantial market cap increase of nearly $3 trillion since early 2023, Nvidia's board approved a 10-for-1 forward stock split on 22 May, which became effective after the closing bell on 7 June. Since receiving board approval, Nvidia shares have risen by 35%.

Another significant example is Chipotle Mexican Grill (CMG), which announced a 50-for-1 split on March 19, effective after the closing bell on 25 June. Between the Mexican-inspired fast food outlet’s announcement and the plan’s implementation, its shares gained more than 17% in value.

Broadcom (AVGO) is also poised for a stock split. The company approved a 10-for-1 forward split on 12 June, scheduled to take effect on 12 July. Broadcom has leveraged its advantages in the AI networking space with innovations such as the Jericho3-AI chip, which connects up to 32,000 GPUs in high-compute data centres. With its growing share of the AI sphere as well as its forthcoming stock split potentially allowing traders with less available capital to get a piece of the pie, it may come as no surprise to find out that Broadcom shares have risen in value by more than 16% since the board’s approval became public. 

Williams-Sonoma: Splitting But Keeping the Hyphen?

While Broadcom's impending split is highly anticipated, Williams-Sonoma (WSM) boasts an even more impressive long-term record of gains in share value. Since its initial public offering (IPO) 40 years ago, Williams-Sonoma's stock has surged by approximately 27,000%.

The company has executed seven forward-stock splits since its IPO. In June 1986, it conducted a 3-for-2 split, followed by another 3-for-2 split in June 1989. Subsequently, it performed a 3-for-2 split in July 1990 and again in February 1994 and September 1994. The company then undertook a 2-for-1 split in May 1998 and another 2-for-1 split in May 2002. After a 22-year hiatus, Williams-Sonoma's board approved an eighth split, a 2-for-1 split via stock dividend on 13 June, effective 8 July. This split aims to enhance the stock's accessibility to investors and employees, particularly benefiting those with employee stock purchase plans (ESPPs).

Williams-Sonoma's success is primarily attributed to its focus on e-commerce and middle-to-upper-income consumers. Two-thirds of its sales are derived from digital channels, and its 11.1% compound annual growth rate in e-commerce since 2019 has effectively managed overhead costs. Additionally, its target demographic is less likely to alter spending habits during economic fluctuations.

Despite its impressive track record, there are concerns regarding Williams-Sonoma's future growth. While the company has consistently surpassed profit expectations, its sales growth has plateaued. With a forward price-to-earnings ratio 34% above its five-year average, the company must resume meaningful sales growth to justify its valuation, according to some analysts. So far this year, the firm’s shares have marked a 41% jump in value.

In summary, although stock splits can signal positive prospects for investors, they do not guarantee future success. Companies such as Nvidia, Chipotle, Broadcom, and Williams-Sonoma have demonstrated that stock splits, coupled with robust business fundamentals, can yield substantial long-term gains. Still, as is always the case with the markets, the future cannot be predicted with high reliability. (Source: Yahoo Finance)

Intel Gets a Power Surge

Although Intel (INTC) isn't part of the stock split hype, its shares saw a rise of over 6.2% on July 8th by the time the closing bell was rung. The proximate cause behind this surge may have been by positive analyst coverage and excitement over upcoming processors that could enhance Intel's role in the AI and gaming hardware markets.

Melius Research analyst Ben Reitzes identified Intel as a top AI investment for the latter half of 2024. Following the impressive gains of AI leaders like Nvidia, Reitzes believes Intel has a strong potential for success. He highlighted Microsoft's (MSFT) new Recall AI feature, which enables users to easily return to earlier data points, as a possible driver of demand for Intel's upcoming Lunar Lake CPUs. These processors are expected to launch later this year or in early 2025.

In addition, Intel is making strides in the graphics processing unit (GPU) market. Over the weekend, reports surfaced that Intel plans to introduce a new graphics processing unit, the Battlemage, which will be manufactured using Taiwan Semiconductor's four-nanometer (4nm) node platform and is set for a 2025 release. While targeted at the gaming market, this move has generated investor optimism about Intel's expanding GPU capabilities. Since the top of the year, Intel shares have shed nearly a third of their value; whether this momentum can be reversed going forward remains to be seen.

Conclusion

In conclusion, while stock splits and tech advancements are exciting market drivers, they don't guarantee future success. The firms analysed above may have to keep ahead of various market challenges, both those prevailing now and those as yet unseen, in order to maintain the share price jumps they registered on Monday, 8 July.