Stock splits are back in the spotlight after Nvidia took this step recently. Investors should remember that this is merely a cosmetic move that does not change the value and fundamentals of a company. What a stock split does is increase the number of shares outstanding while lowering the price of each share. So the overall market value of the company remains the same.
However, there is a belief that a stock split can increase demand for a company’s stock because more investors would be able to buy it, with each share now available at a lower price.
This is probably one reason why the likes Super Micro Computer (SMCI 4.58%) AND ASML Holding (ASML -2.23%) may consider splitting their shares. Let’s check out why these two companies, which are playing a crucial role in the artificial intelligence (AI) revolution, seem ripe for a stock split.
1. Super Micro Computer
Super Micro Computer (also known as Supermicro) stock has tripled in value over the past year and is now worth just over $760 a share. However, it’s still down 34% from the 52-week high it hit in March, which is why management may be considering a stock split to attract investor interest.
Supermicro has never executed a stock split. Management probably didn’t feel the need to do this because the stock was trading at around $80 at the end of 2022. However, growing demand for its AI server solutions has led to an 858% increase in its share price since by early 2023. This means that Supermicro has grown by a multiple of more than 9 in less than 18 months.
That’s why the time seems ripe for a Supermicro stock split. However, because a split is nothing more than a cosmetic move, now would be a good time to buy its shares regardless of a split to take advantage of the recent share price pullback.
After all, demand for Supermicro’s AI servers is so strong that its revenue tripled in the third quarter of fiscal 2024 (which ended March 31) to $3.85 billion, and adjusted net income was quadrupled year over year to $6.65 per share.
Management has guided for fiscal fourth-quarter revenue of $5.3 billion and expects adjusted earnings to come in at $8.02 per share at the midpoint of its guidance range. The company reported $2.18 billion in revenue in the same quarter last year along with adjusted earnings of $3.51 per share. If he lives up to his prediction, the top and bottom lines are set to double again in the current quarter.
And Supermicro can maintain its healthy growth in the long term as the AI server market it supplies is forecast to grow 26% annually for the next five years. Sales of AI servers are projected to grow from just over $12 billion in 2023 to more than $50 billion in 2029.
There are also some more ambitious estimates, with electronics contract manufacturer Foxconn expecting sales of AI servers to reach $150 billion in 2027.
Supermicro’s latest results show that it is growing faster than the AI server market, a sign that it is gaining ground in this space. Overall, the company’s AI-related profit potential and rapid growth are strong reasons to buy the stock now. Additionally, Supermicro is trading at just 21 times forward earnings, a discount for it Nasdaq-100Future earnings multiple of 28 (using the index as a proxy for technology stocks).
So investors have a good opportunity to buy this AI stock, and they should consider taking advantage, given that its healthy prospects will not be affected by a stock split.
2. ASML Holding
ASML Holding is another company that may be considering a stock split, with each share now trading at just over $1,040. The last time the Dutch semiconductor manufacturing equipment supplier executed a split was in October 2007, and its shares have risen 2,250% since then.
These impressive gains are the result of the central role it plays in the semiconductor industry, not because of its split nearly 17 years ago.
ASML’s extreme ultraviolet (EUV) lithography machines allow foundries to produce chips for a variety of applications. And AI is a catalyst that has customers lining up to buy its EUV machines to produce advanced chips using process nodes of 7 nanometers (nm), 5nm, 3nm or smaller. The smaller the process node, the more powerful and efficient the chip.
As the need for AI chips grows, ASML is witnessing strong demand for its EUV machines, and the company had an order backlog worth 38 billion euros ($40.9 billion) at the end of the first quarter of 2024. This is higher than the company’s 2024 annual revenue forecast of $29.6 billion, which is in line with its 2023 revenue.
Management anticipates an acceleration of revenue growth in the second half of 2024 thanks to the recovery in the semiconductor market. Additionally, the company will begin delivering its new $380 million machine to semiconductor suppliers this year to help them produce advanced AI chips.
The market for those chips is projected to reach 38% annual growth through 2032, so ASML should continue to see healthy demand for its EUV machines. And because it’s the only manufacturer of these machines, it’s no surprise to see its earnings growth predicted to accelerate significantly next year.
ASML EPS estimates for the current fiscal year; data from YCharts. EPS = earnings per share.
So even if the company doesn’t split its stock to reduce the value of each share, its outlook suggests it’s built for more upside over the long term. Investors looking for a semiconductor stock with a mission-critical role in the AI revolution might consider buying ASML Holding before its growth accelerates.