Wall Street’s next 10-for-1 stock split is being executed by a company whose business is, arguably, built on a house of cards.
Although all eyes are seemingly on the rise of artificial intelligence (AI), the hottest trend on Wall Street may be companies conducting stock splits.
A stock split is an event that allows publicly traded companies to change their stock price and the number of shares outstanding. Keep in mind that these adjustments are purely cosmetic and have no impact on a company’s market capitalization or its underlying operating performance.
Image source: Getty Images.
There are two types of stock splits, although one is much more popular than the other. The first variety is a forward stock split, which aims to lower the par price of a company’s stock to make it more affordable for retail investors. The other flavor of stock split is a reverse split. As its name suggests, a reverse stock split is designed to increase a company’s stock price, often with the goal of securing continued listing on a major stock exchange.
Since the start of 2024, about a dozen high-flying and/or brand-name businesses have announced a stock split. By far, most investors are drawn to businesses that meet future stock splits. Companies whose stock has grown to the point where a stock split becomes necessary are often innovating and out-performing their peers.
Although companies that perform stock splits have historically exceeded the benchmark S&P 500 in the 12 months following an initial split announcement, not all shares of the stock split are worth buying.
Wall Street’s newest member of this exclusive club is a perfect example of a company investors should avoid at all costs.
July has been a busy month for split stocks
Between stock split announcements and effective dates, July has been a busy month.
It started with one of Warren Buffett’s “forever” holdings in the Berkshire Hathaway completing an under-the-radar 2-for-1 stock split on July 1. Japan-based trading house Mitsui (MITSY -0.03%) (MITSF -4.00%) has its proverbial fingers in many critical sectors and industries within Japan’s economy, including oil and gas operations, manufacturing and food production. Mitsui also has a very shareholder-friendly operating structure that now includes up to $1.3 billion in share buybacks (as of September 20).
This was followed by home furnishings stock Williams-Sonoma (WSM -2.16%) completing a 2-for-1 stock split after the close of business on July 8. Including dividend payments, Williams-Sonoma’s stock has skyrocketed more than 43,000% since its initial public offering (IPO) in 1983.
Although Williams-Sonoma’s stock is more expensive than it has been in recent years, the company has developed a competitive niche that targets middle- and upper-income consumers and relies on e-commerce to lower overhead costs.
Until July 11, Wall Street’s newest breakout stock was the AI networking solutions specialist Broadcom (AVGO -0.00%). Broadcom’s 10-for-1 stock split became effective after the closing bell on Friday, July 12, with the company open at its split-adjusted price as of this morning (July 15).
Broadcom has embraced the wave of AI demand by providing networking solutions that reduce backend latency in high-compute data centers and maximize the computational capacity of AI graphics processing units.
Additionally, Broadcom is one of the leading providers of wireless chips and accessories found in next-generation smartphones. Wireless companies upgrading their networks to support 5G speeds have encouraged a cycle of equipment replacement that has kept Broadcom’s backlog bloated.
While its earnings multiple is significantly more expensive than in years past, Broadcom has the tools to deliver for patient investors.
Image source: Getty Images.
Wall Street’s newest stocks apart from stocks could fall sharply in the coming years
While Mitsui, Williams-Sonoma and Broadcom have the tools and intangibles to be great long-term investments, the same can’t be said for the newest member of the stock split club: the enterprise analytics software company powered by HE. Microstrategy (MSTR 14.38%).
On July 11, MicroStrategy’s board gave the green light to a 10-for-1 stock split, which will take effect after the close of business on August 7. Based on the July 11 closing price, this split will lower MicroStrategy’s stock price to about $136, increasing its number of shares outstanding by a factor of 10.
This move makes a lot of sense and is something I expected. Although MicroStrategy has a decade-old software division, it is best known for being the largest publicly traded corporate holder of Bitcoin (BTC 5.15%). Since late April, CEO Michael Saylor and his team have overseen the purchase of an additional 11,931 Bitcoins, bringing MicroStrategy’s total holdings to 226,331 tokens. Keep in mind that only 21 million Bitcoins will ever be mined.
With retail investors and social media buzz being the main drivers for cryptocurrencies, it made sense for MicroStrategy’s board to make its shares more affordable for everyday investors who may not have access to buying fractional shares through a broker theirs. In fact, the company’s board specifically noted that the split is to “make MicroStrategy’s stock more accessible to investors and employees.”
The thing about MicroStrategy is that most of its $24 billion market cap isn’t built on anything tangible.
While Bitcoin once had first-mover advantages in the crypto arena, it has been left in the technological dust by numerous next-generation blockchain projects. Bitcoin is neither the fastest nor the cheapest when it comes to validating and settling transactions.
To add to this point, El Salvador’s experiment with Bitcoin as a legal tender has largely been a failure. According to a survey conducted by the University of Central America’s Public Opinion Institute, a whopping 88% of Salvadorans did not use Bitcoin in 2023, despite the government’s push for adoption. Reality has shown that Bitcoin offers little or no utility in the real world.
Additionally, MicroStrategy’s Bitcoin assets are valued at a MEANINGFUL premium to the current Bitcoin price. The 226,331 tokens currently held by MicroStrategy are worth about $12.98 billion, as of this writing ($57,347/Bitcoin). However, MicroStrategy’s $24 billion market cap, assuming a reasonable $1 billion to $2 billion valuation for its software operations, implies a $22 to $23 billion valuation for Bitcoin assets. In other words, investors are paying $97,200 to $101,600 per Bitcoin when they buy shares of MicroStrategy when they could simply buy Bitcoin on a cryptocurrency exchange for $57,347 per token.
The cherry on top is that MicroStrategy has funded its Bitcoin leverage strategy by issuing convertible debt. If Bitcoin were to crash, as it has many times before over the past decade, MicroStrategy could be forced to drown its investors in new shares to cover its debt obligations.
With its software business shrinking — annual sales are down 14% over the past 10 years — and its valuation built on a house of cards, MicroStrategy is a stock to avoid like the plague.