1 Stock Split Stock to Buy and 1 Stock to Avoid Hand Over Fist in 2024

While 2023 was a great year for the stock market, volatility has been the name of the game for much of the past four years.of Dow Jones Industrial Average, S&P500and Nasdaq Composite Since the beginning of this decade, we’ve gone back and forth between bear markets and bull markets for several years.

When volatility increases on Wall Street, both professional and casual investors tend to look for companies that have outperformed in the past. For the past two-and-a-half years, stocks that have met this bill have been those that undergo stock splits.

Image source: Getty Images.

Simply put, a stock split is an event that allows a listed company to change its stock price and number of outstanding shares without affecting its market capitalization or operations. This can make stocks nominally more affordable for retail investors (i.e. forward stock splits), or it can increase a listed company’s share price to ensure its continued listing on a major stock exchange. (i.e. reverse stock split).

There are also examples of companies implementing reverse stock splits that continue to generate significant profits for shareholders (e.g. Reservation held), most investors focus on companies that implement forward stock splits. This is because forward splits are often enacted by high-flying companies that have out-innovated and out-executed their competitors.

Since mid-2021, the following nine prominent companies have completed futures stock splits:

• Nvidia (NVDA -2.73%): 4:1 split
• Amazon (AMZN -1.32%): 20:1 split
• dexcom (DXCM -0.81%): 4:1 split
• Shopify (shop -5.22%): 10:1 split
• alphabet (Google -1.09%) (GOOG -0.97%): 20:1 split
• tesla (TSLA -0.02%): 3:1 split
• palo alto networks (PANW -2.02%): 3:1 split
• monster beverage (MNST 1.70%): 2:1 split
• novo nordisk (NVO -1.29%): 2:1 split

NVDA data by YCharts.

All of these companies are strong players with distinct competitive advantages in their respective industries. For example, Nvidia’s graphics processing units are the infrastructure backbone of the artificial intelligence (AI) movement, Amazon accounts for approximately 40% of U.S. online retail sales, and Tesla is North America’s leading electric vehicle (EV) manufacturer. , DexCom is the world’s leading electric vehicle (EV) manufacturer. Two manufacturers of continuous glucose monitoring systems.

However, the individual 2024 (and beyond) outlooks for these nine stock split stocks vary widely. While some split-stock stocks are historically cheap and have the potential for further gains, other high-flyers appear to be headed for a crash.

Stocks that will be replaced through stock split in 2024: Alphabet

All nine of these prominent companies have long-term trends around the benchmark S&P 500, but Alphabet stands out as a stock split stock to buy in the new year. Alphabet is the parent company of popular internet search engine Google and streaming platform YouTube.

Alphabet’s biggest “problem” (if you want to call it that) is that the economy is cyclical. About 78% of the company’s third-quarter revenue came from advertising. It’s not uncommon for companies to quickly cut back on advertising spending at the slightest sign of trouble. Because of this, Alphabet tends to weaken during recessions. Several dollar-based indicators and forecasting tools suggest that a recession is expected in 2024.

However, this is a two-sided coin and is not proportional. While it’s true that recessions are a completely normal and inevitable part of the economic cycle, he’s the only one of his 12 recessions since the end of World War II that lasted at least 12 months. Only three times. Additionally, none of them are older than 18 months.

By comparison, most economic growth lasts for multiple years, with two periods of growth after World War II lasting more than a decade. That means ad-driven businesses are well-positioned to succeed as the U.S. economy expands.

Alphabet’s most obvious competitive advantage has long been its search engine, Google. Google accounted for 91.54% of global search share in November, according to GlobalStats data. You have to go all the way back to March 2015 to find a month in which Google didn’t have at least 90% of the world’s internet search share. Being the undisputed go-to for advertisers looking to reach users gives the company extraordinary advertising pricing power in virtually any economic climate. This moat will not disappear even in 2024.

The new year should also see double-digit growth opportunities for Alphabet’s two fast-growing ancillary segments. YouTube is his second most visited social site in the world with over 2.7 billion monthly active users. The rapid growth of short-form videos (often shorter than 60 seconds) should place ad pricing power in YouTube’s corner.

Canalys estimates that as of the third quarter, Google Cloud accounted for a 10% share of global cloud infrastructure services spending. Enterprise cloud spending still has a long growth trajectory ahead of it, and Google Cloud appears to have made a permanent transition to recurring profitability.

Alphabet stock is a buy at about 14 times estimated cash flow per share in 2024, despite the potential for sustained double-digit earnings growth over the next five years (if not much longer) can. This corresponds to a 20% discount from the average multiple to cash flows. For the past 5 years.

The Model 3 is Tesla’s best-selling sedan. Image source: Tesla.

Stock split stocks to avoid in 2024: Tesla

To quote Wall Street’s most famous investment disclaimer: “Past performance is no guarantee of future results.” EV maker Tesla has a habit of proving naysayers wrong for more than a decade, but it’s clearly a stock split stock to avoid in 2024 for a variety of reasons.

Before I dig into those reasons, let me give credit where credit is due. Tesla is currently the only pure EV maker that is profitable on a recurring basis. Although other automakers are profitable, no traditional company generates recurring profits from an electric vehicle-only division. When Tesla reports its fourth quarter operating results, I expect Tesla to achieve its fourth consecutive year of generally accepted accounting principles (GAAP) profit.

Unfortunately for the world’s largest automaker by market capitalization, its first-mover advantage is beginning to wane, and cracks in its foundations are evident.

The best evidence that Tesla is in trouble is that its operating margin has more than halved to 7.6% in the year ended September 30th.

Major North American EV companies have reduced the prices of Model 3, S, X, and Y more than six times in 2023. Based on comments made by CEO Elon Musk at the company’s annual shareholder meeting in May, these price cuts were solely based on demand. It is clear that demand for the company’s EVs is decreasing as vehicle inventory levels rise. It also suggests additional price cuts may be needed to control inventory levels as Tesla continues to ramp up production.

Another potential problem for Tesla is how it makes money. Tesla posted a profit of $554 million in the third quarter from the sale of renewable energy credits granted free of charge by the government. He also generated $282 million in interest income from his huge pile of cash. This equates to a pre-tax profit of $836 million, or 41% of the company’s third-quarter pre-tax profit, but its origins are considered unsustainable.

Elon Musk is a big reason why Tesla has been so successful since going public in 2010, but he’s also a real liability to shareholders. Aside from the fact that he has attracted the attention of securities regulators on several occasions, his biggest flaw is that he regularly over-promises new innovations (including new EVs) and then under-delivers. . Tesla’s huge valuation appears to be based on Musk’s countless unfulfilled promises.

Finally, Tesla’s efforts to become more than just a car company largely missed the point. Profit margins in ancillary segments are low, while auto profit margins continue to decline. Tesla is valued at 65 times consensus 2024 earnings, while most auto stocks trade at 6 to 8 times prior year’s estimated earnings. This is not a valuation that can be maintained as operating profit margins are rapidly declining.