Guarantees are almost non-existent on Wall Street…except for volatility. Short-term movements of major stock indices are systematically unpredictable. During periods of increased volatility (especially on the downside), it is not uncommon for investors to seek safety in industry-leading companies that have historically outperformed the benchmark. S&P500.
Although FAANG stocks have been popular with investors for years, companies conducting stock splits attract a wider audience during uncertain times.
A “stock split” is an event in which a publicly traded company changes its stock price and number of shares outstanding by the same magnitude. This is a purely cosmetic decision that has no impact on a company’s market capitalization or operational performance.
Stock pins come in two forms: front and rear. A forward stock split reduces the par price of a company’s stock to make the purchase more affordable for retail investors without access to split stock purchases. Conversely, the purpose of a reverse stock split is to increase a company’s stock price to ensure that it meets the minimum standards for continued listing on a major exchange.
Although some reverse stock splits have been successful over the long term (see a long-term chart of Reservation of funds if you don’t believe me), most investors focus on companies that do forward spinoffs. Highfliers who perform forward splits are often more innovative and successful than their peers. In short, these are exactly the type of companies we expect to outperform over the long term.
But not all of Wall Street is convinced that some split stocks are rising. Based on the low price targets set by some Wall Street analysts, the following three split stocks could plunge as much as 29%!
Nvidia: implied drop of 22%
The first split stock that at least one analyst thinks could collapse is none other than the artificial intelligence (AI) juggernaut. Nvidia (NASDAQ:NVDA). Nvidia recently announced plans to conduct a 10-for-1 forward split, which follows a 4-for-1 split completed in July 2021.
According to analyst Gil Luria of DA Davidson, Nvidia is worth $900 per share. If that was the price target a year ago, Luria would be considered one of the most bullish analysts on Wall Street. But with Nvidia shares closing just north of $1,148 on May 29, that implies the best-performing megacap since the start of 2023 could fall 22%.
Apparently, Nvidia has been firing on all cylinders. The company’s H100 graphics processing units (GPUs) are clearly the first choice for enterprises operating AI-accelerated data centers. As a result, its pricing power was off the charts and its gross margin exploded upwards.
Unfortunately for Nvidia, competition is inevitable. During the third trimester, Intel is expected to roll out its Gaudi 3 AI accelerator chip to its customers. In the meantime, Advancing microdevices has increased production of its MI300X GPU, which is also tasked with taking on Nvidia’s H100 chips in high-computing data centers.
The biggest concern, as I’ve pointed out repeatedly, is that Nvidia’s major customers are all developing their own AI GPUs. Microsoft, Metaplatforms, AmazonAnd Alphabet represent about 40% of Nvidia’s sales, but complement Nvidia’s H100 chips with internal GPUs. This year likely marks a peak in orders, gross margin, and GPU pricing power for Nvidia.
Finally, history seems to be catching up with Nvidia. There has not been a major investment in three decades that has avoided the bursting of a bubble. While artificial intelligence likely has a bright future, initial adoption and uptake of the technology will almost certainly be more difficult than investors anticipate. If the AI bubble bursts, no company will be hit harder than Nvidia.
Amphenol: implied decrease of 29%
A second split stock that one Wall Street expert plans to dive into in the not-too-distant future is that of the electronic components giant. Amphenol (NYSE:APH). On May 20, Amphenol’s board of directors approved a 2-for-1 forward split that is expected to take effect June 11.
Although Amphenol has been circling the benchmark S&P 500 since the early 1990s — a gain of nearly 46,000% for Amphenol, compared to about 1,240% for the S&P 500 — Stifel analyst Matthew Sheerin has a tepid outlook for the company. Sheerin’s price target of $95 implies that Amphenol shares will decline 29% and thus lose approximately $23 billion in market capitalization.
The most logical reason Sheerin is skeptical of Amphenol is the company’s valuation.
The secret to Amphenol’s success is its mass manufacturing of electrical and fiber-optic connectors, coaxial cables and a host of other generally inexpensive components. It is a company that has been able to win the volume game and thus generate solid margins.
But right now, it’s trading north of 34 times earnings per share (EPS) for the coming year, with an expected annualized earnings growth rate of 13.4% over the next five years. For comparison, Amphenol has averaged a forward P/E multiple of 27 over the past five years. Except for a relatively short period in early 2018, investors have to go back to the dotcom bubble to see the last time Amphenol shares were this expensive on a 12-month basis.
Amphenol is also cyclical, and some predictive indicators suggest that trouble could be on the horizon for the U.S. economy. For example, the first significant decline in the U.S. money supply since the Great Depression portends economic weakness. If the U.S. or global economy enters a recession, orders for electronic components are expected to slow.
Lam Research: implied decline of 24%
The third split stock that may fall, according to a Wall Street analyst’s prognosis, is the semiconductor wafer manufacturing equipment company. Lam Search (NASDAQ:LRCX). Lam’s board authorized a 10-to-1 split on May 21, which is expected to go into effect before the opening bell on Oct. 3.
Similar to Walmart And Chipotle Mexican Grillwhich announced respective 3-for-1 and 50-for-1 forward splits earlier this year, Lam’s stock split is designed to make the shares more nominally affordable for its employees, so they can participate in the stock plans. shareholding of the company’s employees.
But after a 1,440% gain in Lam Research stock over the past 10 years, Morgan Stanley analyst Joseph Moore is not a fan. Moore’s $720 price target for Lam suggests this leading wafer equipment supplier could fall 24% over the next year.
One reason Moore might be behind Lam Research, at least based on its current stock price of $953, is that U.S. regulators are doing the semi-equipment industry no favors. drivers. Just as regulators have restricted exports to China of Nvidia’s A100 and H100 high-power AI GPUs twice in the past two years, they have also restricted the export of wafer manufacturing equipment to the world’s second-largest economy. in terms of gross domestic product. These export restrictions clearly limit Lam’s ability to capitalize on the AI revolution.
Valuation is another obvious concern. Over the past five years, Lam Research has traded at approximately 4.7 times sales and 17 times forward EPS. Shares are currently valued at 7.1 times next year’s consensus sales and nearly 27 times next year’s earnings. That’s a high price to pay for a highly cyclical industry.
Finally, Moore might worry about economic headwinds. While the U.S. economy continues to grow (to the benefit of Lam Research), persistent month-over-month declines in the Conference Board’s Leading Economic Index (LEI) point to weakness in the U.S. economy in the second semester. At the same time, as noted earlier, falling M2 is also a sign of trouble. Cyclical companies that trade at a premium are often hit hardest during short-term economic contractions.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams holds positions at Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Booking Holdings, Chipotle Mexican Grill, Lam Research, Meta Platforms, Microsoft, Nvidia and Walmart. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short $47 calls in May 2024 on Intel. The Motley Fool has a disclosure policy.
3 Split Stocks That Can Plunge Up to 29%, According to Some Wall Street Analysts, originally published by The Motley Fool