Artificial intelligence (AI) stocks have been hot for two years. Some have done so well that the companies split their stocks to make it easier for investors to continue buying shares. For example, chip companies Nvidia and Broadcom soared to between $900 and $1,500 per share before executing 10-for-1 splits earlier this year.
It’s important to remember that stock splits lower the share price by proportionately increasing the share count. The stock’s fundamental value doesn’t change because these cheaper shares represent less of the company. It’s similar to slicing the same cake into smaller slices. The entire cake is still the same size.
Still, investors tend to love stock splits. Nvidia has appreciated 45% since announcing its split in May, and Broadcom has risen 20% since its June split announcement. So, which AI stock might be next? Here is my prediction.
Social media giant Meta Platforms (NASDAQ: META) is arguably the most likely candidate. When you follow the evidence, it just makes too much sense. For instance, Meta’s share price has become increasingly difficult for individual investors to afford. The stock trades at $575 per share, near its all-time high of just over $600.
That’s not to say Meta is fundamentally expensive; quite the contrary. The stock trades at a forward price-to-earnings ratio of 27, and analysts expect the company’s earnings to grow by an average of 19% annually over the next three to five years. At a price/earnings-to-growth ratio (PEG) of just 1.4, the valuation makes sense for its growth, which means the stock could realistically continue to appreciate over time.
Yet, with the stock priced at nearly $600 per share, fewer investors canaccumulate a meaningful number of shares. Buying just 10 shares means tying up almost $6,000 in capital, which could take a long time for many individual investors to save. A stock split would fix that issue.
Stock splits aren’t just for the sake of investors, but for employees, too. Technology companies commonly issue stock to employees as part of their compensation. If someone has spent years at a successful company, that stock might be worth lots of money.
Employees who want to cash in some stock may not want to sell it in increments of $600 or more per share; they might want more liquidity. Just look at the billions of dollars’ worth of stock Meta has issued over time:
META stock based compensation (TTM), data by YCharts; TTM = trailing 12 months.
It’s worth noting that Meta has never executed a stock split since its 2012 initial public offering (IPO). Yet, the stock has appreciated significantly from its IPO price of $38 per share. The higher the stock goes, the more longtime employees would probably enjoy the flexibility that a stock split would give them.
Perhaps the most underrated aspect of a stock split is the message it can send to the market. The whole idea of a split is to draw buyers to the stock, but it should come under the right circumstances.
Consider Nvidia again for a moment. The company’s stock appreciated almost 550% from the start of 2023 to when it announced the split on May 22, 2024. A stock doesn’t move like that unless things are going well, making it easy for Nvidia to send a positive message with its split. It was like saying, “Hey, we’re knocking it out of the park, and we want to allow more investors to join us!”
Messaging is important. Think about a company like ASML Holding. It is trading at a higher price than Meta today, but the company is facing some recent adversity. Shares have fallen more than 30% from their high.
What kind of message does it send if a stock is split while things aren’t going well? A negative or desperate message probably won’t attract buyers; it’s more off-putting than anything.
Meta Platforms’ stock has appreciated more than 370% since January 2023 and is near its all-time high today. The numbers justify a stock split, and the backdrop is perfect for sending a strong, positive message. It’s my prediction for Wall Street’s next AI stock split, and is the runaway favorite, if you ask me.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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