One of Wall Street's best-performing stocks is perfectly positioned to announce a stock split later this week.
For the better part of the past two years, Wall Street and investors have been fixated on the artificial intelligence (AI) revolution, but they may not have realized just how important the stock split frenzy could be in driving Wall Street's major stock indexes higher in 2024.
A stock split is a means by which a publicly traded company can cosmetically adjust its stock price and the number of shares outstanding by the same factor. Stock splits are cosmetic in the sense that they do not change the company's market capitalization or affect its underlying financial performance.
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There are two types of stock splits, one of which is undoubtedly favored by investors: reverse stock splits, which are intended to raise a company's share price, often to maintain minimum listing standards on major stock exchanges. This is the type of split that distressed companies undertake, and so investors typically steer clear of it.
Stock splits, on the other hand, excite investors. They lower a company's stock price, making it nominally more affordable for ordinary investors who can't purchase fractional shares through a broker. This type of split is almost always undertaken by companies with a strong track record of outperforming their peers.
More than 10 high-profile stock splits have been announced or completed in 2024, with all but one being positive splits.
Wall Street is flocking to AI stock splits
With AI stocks gaining attention, it's no surprise that three of Wall Street's most talked-about stock splits this year were linked to this high-profile trend.
NVIDIA is a flagship company in the rise of AI and arguably the most glamorous stock to split in 2024. The company's shares have soared more than 675% since the beginning of 2023 due to the dominance of its graphics processing units (GPUs) in AI-accelerated data centers. According to TechInsights, it will account for an estimated 98% share of GPUs shipped to data centers in 2022 and 2023. There is pent-up demand for the company's H100 GPUs, which has led to exceptional pricing power and a significant increase in the company's gross margins.
Broadcom has quickly emerged as the preferred choice for networking solutions for high-computing data centers. Their solutions reduce tail latency and maximize GPU computing power in enterprise data centers that train large-scale language models, run generative AI solutions, and make split-second decisions. Broadcom is not just an AI stock, but AI is the source of the excitement surrounding the company right now.
Supermicro Computer Inc. has become one of the key infrastructure providers for the AI revolution, with its customizable rack servers incorporating Nvidia's H100 GPUs seeing strong demand as companies look to establish first-mover advantage, helping the company's net sales grow 110% last year.
But while AI stocks will continue to garner attention on Wall Street throughout 2024, another big-name company announced a stock split that's well-positioned to grab attention in the fourth quarter.
This may have been the most anticipated stock split of the fourth quarter
One stock that could stir Wall Street if it announces a forward split later this week is none other than Warehouse Club. Costco Wholesale (Fee 0.69%).
Costco is scheduled to report its fourth-quarter results after the close of trading on September 26, which would be the perfect time to also announce the stock split.
As of the closing price on September 18, Costco's stock was trading at over $892 a share. More importantly, the company has only split its stock three times since going public, with the last one dating back to January 2000. In other words, making its shares more affordable for individual investors and employees who want to participate in the company's employee stock ownership plan seems long overdue.
The only logical reason why Costco has avoided splitting its stock for so long, aside from fractional share purchase functionality becoming more prevalent with most online brokers, is the fact that roughly 72% of the company's stock is held by institutional investors who don't mind a nominal stock price surge. But at some point, a stock price close to $900 becomes too much for employees and retail investors. I believe Costco has reached that point.
Additionally, Costco's valuation is historically high, currently trading at 50x stock price.yesThe stock is priced at 50 times future earnings per share, a number that's almost unheard of for a retailer. The company would need a lot of buzz to grow to its current valuation, and its first stock split in 24 years might be just what the doctor prescribed.
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Costco's secret to success revealed
Costco Wholesale Corp. is arguably poised to surprise Wall Street with a stock split, but the company's underlying business remains strong.
Costco's success lies in the advantages it gains from its size. The ability to buy products in bulk helps lower the unit cost of each item. Ultimately, this allows the company to offer lower prices than local stores and national grocery chains, creating a value proposition that keeps consumers coming back for more.
Costco is also a consumer staples stock, which means it sells a variety of essential items like food, beverages, and household cleaning/hygiene products that consumers buy regardless of whether the U.S. economy is booming or bustling. That makes it an attractive stock that draws customers into its stores no matter what the economic climate.
Another key element of Costco's success story is its membership-based operating model. The $65 and $130 annual membership fees that Costco charges members are high-margin and feed straight into profits. These fees also provide a solid margin buffer, allowing the company to undercut its peers on price and drive membership growth.
Finally, paying an annual membership fee tends to increase shopper loyalty: Consumers want to get the most out of their membership, and are more likely to visit Costco for big-ticket purchases. Getting consumers into the stores is half the battle, and Costco has been winning it for decades.
