Stock splits have no impact on business fundamentals like revenue or earnings, but they can cue investors in to potentially worthwhile investments. Stock splits are only necessary following sustained share price appreciation, and that rarely happens by accident. Instead, it often points to a business that is firing on all cylinders.
Several well-known companies have split their stocks in the past few years, including:
- Apple: a 4-for-1 split in August 2020.
- Alphabet: a 20-for-1 split in July 2022.
- Churchill Downs: a 2-for-1 split in May 2023.
- Dexcom: a 4-for-1 split in June 2022.
- Intuitive Surgical: a 3-for-1 split in October 2021.
- Palo Alto Networks: a 3-for-1 split in September 2022.
- Shopify: a 10-for-1 split in June 2022.
Every company on that list outperformed the benchmark S&P 500 over the past five years, but two stand out for exceptional outperformance over the past 20 years with returns of more than 30,000%.
Let me be blunt: A repeat performance is highly unlikely. But given such compelling returns, are these stock-split growth stocks worth buying?
1. Nvidia
Nvidia (NVDA -2.15%)is best known for inventing the graphics processing unit (GPU), a chip now synonymous with artificial intelligence (AI) infrastructure, but the term "chipmaker" is a poor description. Nvidia is an accelerated computing company with a portfolio comprising hardware, software, and services that address four big markets: gaming graphics, professional visualization, data center computing, and automotive computing.
The company executed a 4-for-1 split in July 2021, and in the last two decades has a return of 32,860%. That means $4,000 invested in Nvidia in September 2003 would be worth $1.3 million today.
Nvidia delivered incredible financial results in the second quarter. Revenue soared 101% to $13.5 billion on booming growth in the data center business, and non-GAAP earnings more than quintupled to $2.70 per diluted share as high-margin software and services continued to grow as a percentage of total sales.
The bull case for Nvidia centers on its dominance in graphics and AI. It holds more than 90%market share in workstation graphics and supercomputer accelerators, including 95% market share in machine learning processors. The brand authority the company has cultivated in hardware paves the way for its young software and services business to grow from hundreds of millions of dollars today to tens of billions of dollars in the future.
Indeed, management says its products address a $1 trillion market, comprising $600 billion from data center and professional visualization, $300 billion from automotive, and $100 billion from gaming. But those growth prospects, as considerable as they may be, fail to justify its current valuation.
The stock more than tripled in value this year, and shares currently trade at 117 times earnings. Nvidia is a wonderful company, but that is an exorbitant valuation multiple, especially when Wall Street has penciled in annual earnings growth of 33% over the long term. For that reason, investors should wait for a pullback before buying stock in Nvidia.
2. Monster Beverage
Monster Beverage (MNST -0.24%) executed a 2-for-1 split in March 2023. Its return in the last two decades is even bigger than Nvidia's, at 90,380%. An investment of $4,000 in September 2003 would be worth $3.6 million today.
Monster is best known for energy drinks sold under various brands, including Monster Energy, Reign, Predator, and Nos. But the company also has a burgeoning alcoholic-beverage business born of its 2022acquisition of CANarchy, a craft beer and hard seltzer company. Monster moved further into that market with its 2023 launch of The Beast Unleashed, a line of flavored malt beverages.
Monster has two important competitive advantages. First, it has cultivated powerful brand authority through effective marketing and regular innovation. The company introduced 20 new products last year alone. Second, an exclusive partnership with Coca-Cola positions Monster as the only energy-drink brand with access to the largest beverage distribution system in the world.
The combination of brand strength and broad distribution capabilities have propelled Monster to the forefront of the energy drink market in the United States and Japan, among other countries. And its leadership position in those areas has consistently led to solid financial results.
Second-quarter revenue rose 12% to $1.8 billion because of steady growth in the Monster Energy segment and rapid growth in the alcoholic-brands segment. Better yet, gross margin expanded 540 basis points to 52.5%, in part because of price increases, and GAAP net income soared 50% to $0.39 per diluted share.
Monster should be able to maintain its top-line momentum. The global energy-drink market is expected to grow at 8.3% annually through 2030, but Monster should beat the average given its brand authority and broad distribution reach. In addition, alcoholic beverages accounted for just 3% of total sales through first half of the year, but the segment is growing quickly and Monster has a robust innovation pipeline.
Currently, shares trade at 41.7 times earnings, a pricey multiple and a premium to the three-year average of 37.8 times earnings. Wall Street is forecasting 21% annual earnings growth over the long term, so the current valuation is not as outlandish as Nvidia's. Risk-tolerant investors could buy a very small position in this growth stock today, though it may be prudent to wait for a pullback.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Nvidia and Shopify. The Motley Fool has positions in and recommends Alphabet, Apple, Intuitive Surgical, Monster Beverage, Nvidia, Palo Alto Networks, and Shopify. The Motley Fool recommends Churchill Downs and DexCom and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
