Although hype surrounding the rise of artificial intelligence (AI) has been a key factor that's sent Wall Street's major stock indexes to record levels, it's important not to overlook the role stock-split euphoria has played in lifting the valuations of some of Wall Street's most-influential businesses this year.
A stock split is a tool publicly traded companies have at their disposal that can allow them to alter their share price and outstanding share count by the same factor. Keep in mind that stock splits are purely superficial -- i.e., they don't change a company's market cap, or in any way influence operating performance.
Image source: Getty Images.
Among the two types of stock splits -- forward and reverse -- investors clearly favor forward splits. Reverse-stock splits, which increase a company's share price, are usually completed from a position of operating weakness, and are often designed to ensure continued listing on a major stock exchange.
Meanwhile, forward-stock splits are enacted by high-flying stocks that almost always have a rich history of out-executing and out-innovating their competition. Among the 13 phenomenal businesses that have announced or completed a stock split in 2024, 12 are of the forward-split variety.
While most attention has been given to Wall Street's AI darlings, Nvidia, Broadcom, and Super Micro Computer, which have all announced or completed respective 10-for-1 forward splits, a few other high-profile stock-split stocks have quietly moved into nosebleed valuation territory.
Though valuation is a subjective term, the following two stock-split stocks, not named Nvidia, appear to be priced for perfection.
Chipotle Mexican Grill
The first high-flying stock-split stock that's bound to have fundamentally focused investors scratching their head in disbelief is none other than fast-casual restaurant chainChipotle Mexican Grill(NYSE: CMG). Chipotle completed a historic 50-for-1 split in June (the company's first-ever split), which was necessitated following a gain of more than 12,200% since its initial public offering price (IPO) in January 2006.
There's no denying that Chipotle has brought clearly defined competitive advantages to the table, resulting in the consistent outperformance of its peers.
For starters, Chipotle has made a promise to its customers to use responsibly raised meats, free of unnecessary antibiotics, and to source its vegetables locally, when possible. Chipotle's core customer has demonstrated a willingness to pay a premium price for food they deem to be higher quality. Thus, Chipotle has had little issue staying ahead of the inflationary curve.
The company's limited menu can be considered a competitive edge, too. A smaller menu is what allows Chipotle to prepare its meals fresh daily, as well as expedite the ordering process. A limited menu also helps to give new items more buzz when they're introduced.
Innovation has been key, as well. Beginning in 2018, Chipotle Mexican Grill introduced its "Chipotlanes" concept, which is a drive-thru lane devoted to mobile ordering. This concept was critical to its success during the COVID-19 pandemic.
But in spite of all of these positives, Chipotle is currently valued at 42 times consensus earnings per share (EPS) for 2025. There's only so much innovation that can be squeezed out of a fast-casual restaurant chain, which makes its forward price-to-earnings (P/E) ratio of 42, which is nearly double that of the benchmark S&P 500, all the more egregious.
What's more, Chipotle's organic growth rate, sans new store openings, fails to support a forward P/E of 42. Even with high-margin digital sales climbing, Chipotle registered comparable-restaurant sales growth of "just" 7% in the March-ended quarter and 11.1% in the latest quarter. With some of these gains coming from simple price increases, it exposes just how much this stock is priced for perfection.
It could take years of double-digit earnings growth before Chipotle's current valuation makes sense.
Image source: Getty Images.
MicroStrategy
The other stock-split stock that looks to be priced for perfection and is, in my view, worth avoiding, is AI enterprise analytics software company MicroStrategy(NASDAQ: MSTR). In August, MicroStrategy completed a 10-for-1 forward split.
Though it's technically a software company, very little of MicroStrategy's $24.3 billion market cap derives from its enterprise analytics software segment. Rather, the bulk of MicroStrategy's valuation can be traced to its Bitcoin(CRYPTO: BTC) holdings. As of July 31, it owned 226,500 Bitcoins, which is more than 1% of the 21 million tokens that'll ever be mined.
The most glaring flaw with MicroStrategy's valuation is the inexplicable premium investors have placed on its Bitcoin portfolio, relative to the current price of the world's largest cryptocurrency by market value. With Bitcoin at $56,735 per token, as of this writing, MicroStrategy's crypto assets are worth $12.85 billion. Loosely assigning a $1 billion valuation to its software operations puts the premium investors are paying for MicroStrategy's Bitcoin assets at a whopping 89%, or around $107,000 per Bitcoin.
In addition to grossly overpaying for MicroStrategy's digital assets, investors appear to be ignoring just how risky the company's strategy has been to finance its Bitcoin purchases.
CEO Michael Saylor has overseen a number of convertible-debt offerings to raise capital so his company can buy Bitcoin. The problem with this approach is that the world's largest cryptocurrency has endured a couple of very steep bear markets since its inception. Further, there's the possibility MicroStrategy's software segment won't be able to generate sufficient operating cash flow to service its debt.
The final flaw for MicroStrategy is its aforementioned software segment, which has seen sales decline by 14% over the trailing decade (ended Dec. 31, 2023).
While I'm, admittedly, not a fan of Bitcoin, as I feel it's first-generation network that's been outdone by third-generation blockchain platforms, there are a lot of ways to invest in it if you're an optimist. Buying shares of MicroStrategy just might be the worst possible way to show your support.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Chipotle Mexican Grill, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
