In case you haven’t noticed, the bull market is in full swing on Wall Street. The ageless Dow Jones Industrial Average, broad-based S&P 500, and growth-fueled Nasdaq Composite, have all soared to multiple record highs in 2024.
While much of this optimism has been attributed to the hype surrounding artificial intelligence (AI), it would be a mistake to overlook the role investor euphoria has played in lifting the tide for market-leading businesses enacting stock splits.
A stock split is a tool publicly traded companies can lean on to superficially adjust the share price and outstanding share count of their stock. This adjustment is cosmetic in the sense that it doesn’t alter a company’s market cap or in any way affect its operating performance.
Image source: Getty Images.
Since the start of 2024, more than a dozen prominent businesses have completed a stock split, and all but one has been of the forward variety. A forward split makes shares nominally cheaper for retail investors who lack access to fractional-share purchases through their broker.
At the moment, one of these high-profile stock-split stocks makes for a no-brainer buy, while another is rife with red flags.
The magnificent stock-split stock that’s sending out all the right signals for investors is Japan-based consumer electronics colossus Sony Group(NYSE: SONY). Sony’s American depositary receipts (ADRs) completed a 5-for-1 forward split on Oct. 8, which reduced Sony’s share price from the mid-$90s to around $19.
Some investors might be skittish about putting their money to work in Sony given that it’s in the middle of a console development cycle. The PlayStation 5 (PS5) was released roughly four years ago, and it’ll probably be another two years, at minimum, before the company’s next-gen console is on retail shelves. It’s not uncommon for console sales to lag this late in the cycle.
However, Sony Group has a number of levers it’s been able to pull to bolster its important gaming segment.
In August, the company announced it would raise the price of its PS5 console by 19% in its home market of Japan. Additionally, PlayStation Plus revenue has been increasing. This is a subscription service that allows people to game with their friends, access exclusive titles, and save their data to the cloud. It’s a relatively high-margin way to build on this nicely profitable operating segment.
Something else to consider is that Sony Group’s stock often rallies well in advance of the release of its next-generation gaming console. Game and Network Services accounted for 28% of Sony’s consolidated sales in the latest quarter, and the figure could meaningfully expand when the next-gen console hits retail shelves in two or three years.
But there’s more to Sony Group than meets the eye. Beyond the PS5, it’s a major player in movie and television production, music streaming and publishing, and is vital to the smartphone industry. The company’s Imaging and Sensing Solutions segment is enjoying double-digit sales growth, as of the quarter ended June 30, due in part to image sensors used in next-gen smartphones being in high demand. The 5G revolution has encouraged a consistent device replacement cycle, which has clearly been beneficial to Sony.
To round things out, Sony Group looks like an amazing value amid a historically pricey stock market. Shares of the company are currently trading at 14 times forecast earnings for the following year. Given Sony’s current and upcoming catalysts, long-term investors shouldn’t be shy about pouncing on this electric stock-split stock.
Image source: Getty Images.
On the other end of the spectrum is a stock-split stock that should be avoided at all costs. While I’ve been critical of the valuations of a few high-flying stock-splits stocks, including AI kingpin Nvidia and fast-casual restaurant chain Chipotle Mexican Grill, neither of these market-leading business holds a candle to the valuation premium that AI-focused enterprise analytics software company MicroStrategy(NASDAQ: MSTR) brings to the table.
With its stock soaring from around $142 per share when 2022 came to a close, to $2,000 per share on an intra-day basis in late March 2024, it made perfect sense for MicroStrategy’s board to capitalize on stock-split euphoria and announce a 10-for-1 forward split in July. Retail investors have played a key role in sending shares of MicroStrategy higher, so reducing the company’s share price to make it more nominally affordable for everyday investors was a smart move.
But this is all the praise MicroStrategy is going to get from me.
Although it’s a software company in name, MicroStrategy’s bloated $44.4 billion market cap has little to do with enterprise analytics software. Rather, it’s the No. 1 corporate holder of Bitcoin(CRYPTO: BTC), the largest cryptocurrency by market value. Based on a Sept. 20 filing with the Securities and Exchange Commission, MicroStrategy held 252,220 Bitcoin, which equates to 1.2% of the outstanding supply of Bitcoin that’ll ever be mined (21 million tokens).
As of this writing of Oct. 21, a single Bitcoin would set an investor back $67,464. This means MicroStrategy’s Bitcoin assets have a value of $17.02 billion. However, MicroStrategy’s Bitcoin portfolio is currently being valued at north of $43 billion by Wall Street (assuming a generous value of about $1 billion for its software division). To put this into perspective, investors who are optimistic about Bitcoin could purchase it directly from a crypto exchange for $67,464 right now. But if you buy shares of MicroStrategy, you’re paying about a 155% premium, or roughly $172,000 per token. This is a premium for the ages, and it’s not going to end well for investors.
To make matters worse, MicroStrategy has financed its Bitcoin purchases by selling billions of dollars of convertible debt. With the company’s software segment losing money and generating minimal operating cash flow, there’s a very real possibility MicroStrategy won’t be able to service its outstanding debt.
Lastly, the bull case for Bitcoin is very much in question. It, arguably, failed its real-world use case in El Salvador, and we’ve witnessed multiple next-generation blockchain networks validate transactions at a cheaper and faster rate. What’s more, Bitcoin’s perceived scarcity is a function of computer code and isn’t, necessarily, written in stone.
The otherworldly valuation premium currently bestowed on MicroStrategy simply isn’t sustainable.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Chipotle Mexican Grill, and Nvidia. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
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