Stock splits have received so much attention this year that several notable companies have decided to take the step in a bid, among other things, to make their stock prices more attractive to retail investors.
apple (AAPL -1.06%) And the nvidia (NVDA -2.42%) Two companies that started stock splits relatively recently. It’s been two years since Apple implemented a 4-for-1 stock split on August 28, 2020. The company’s stock price is up 29% since the stock began trading on a split-rate basis, overtaking Standard & Poor’s 500 Fantastically good despite the recent volatility in the market.
Nvidia’s stock price also took off after its 4-for-1 split on July 20, 2021. But 2022 was terrible for the chip maker thanks to an oversupply in the graphics card market that dealt a huge blow to its gaming business.
A stock split is a cosmetic move that simply increases the number of shares outstanding while reducing the price proportionately. This move does not change the company’s prospects or intrinsic value. But it makes stocks more accessible to a larger group of investors. This may increase the demand for the company’s shares, and raise the price higher.
A stock split shouldn’t be the only reason to buy stock in a company. However, fragmented stocks like Apple and Nvidia are big buys by chance given the opportunities they are sitting on and evaluating them. Let’s look at the reasons why buying these companies seems like a good idea in the midst of a massive sell-off in the market.
Apple and Nvidia have strong long-term growth potential
Apple and Nvidia operate in markets with impressive long-term growth potential, and both companies are dominant players in their respective sectors.
Apple, for example, is taking advantage of the rapid adoption of 5G smartphones. It led the 5G smartphone market in 2021 with a 31% share, according to Strategy Analytics, and appears to maintain its dominance in 2022 as well. Apple shipped 101 million iPhones in the first six months of 2022, up slightly from 99.7 million units in the same period last year. This slight increase came at a time when total smartphone shipments contracted by 8.8% year-on-year over the same period.
The high prices of 5G smartphones play a role in Apple’s favour. Android users are switching to iPhones, and the company’s installed user base is also upgrading to its new devices. Global 5G mobile subscriptions are expected to reach 4.4 billion in 2027 from an estimated billion this year, and Apple’s largest product line appears to have a bright future ahead.
By dumping other catalysts like the services sector, Apple is moving into emerging but potentially profitable areas like the metaverse and self-driving cars, and its growth could improve in the long run. Analysts currently expect Apple to grow 9.5% annual earnings over the next five years, but it wouldn’t be surprising to see it grow at a faster pace thanks to multiple catalysts.
Nvidia, on the other hand, is the major player in the discrete graphics card market. These chips are popularized in personal computers and gaming laptops. Nvidia captured 78% of that space in the first quarter of 2022, according to Jon Peddie research. However, the graphics card market is currently in poor shape due to oversupply, forcing the company to cut prices and stocks.
Nvidia’s fiscal second-quarter 2023 revenue rose just 3% year-over-year to $6.7 billion. The company expects a significant contraction in its net profit during the quarter. But investors shouldn’t forget that Nvidia is expected to get its magic back in the next fiscal year. Analysts expect the company’s earnings to increase by 14.5% in fiscal year 2024 after increasing just 2% this year. The five-year earnings growth forecast of 22.8% is also bright.
These estimates are not surprising, as the discrete graphics card market is expected to generate annual revenue of $57 billion in 2025, up from revenue for the subsequent twelve months of $46 billion. More importantly, Nvidia has other notable catalysts in the form of data center and auto companies.
Data center was its biggest business last quarter, taking 57% of the top line. This segment generated $3.8 billion in revenue, up 61% from the previous year. Automotive revenue increased 45% year-over-year to $220 million. These companies can maintain impressive momentum thanks to their growing appetite for chips, as well as Nvidia’s automotive design wins and efforts to expand the product lineup in the data center business to take advantage of new opportunities.
Apple’s stock is down 9% in 2022. And Nvidia has taken an even bigger hit, with its shares dropping nearly 47%.
Apple’s decline lowered the company’s price-to-earnings (P/E) ratio to 27, which is lower than multiples of 2020 and 2021 at 40 and 31, respectively. If the stock market sell-off continues in the near term, investors will have the opportunity to buy Apple shares at a more attractive valuation.
Nvidia’s late P/E ratio of 46 is a big discount to its 2021 multiplier of 90. The company faces near-term headwinds thanks to the weakness in the gaming segment, but the points above suggest it’s designed for long-term growth. That’s why investors should keep a close eye on Nvidia if the stock market sell-off intensifies thanks to Fed hawks, as there may be opportunities to buy semiconductor stock at a cheaper valuation.
Harsh Chauhan has no position in any of the stocks mentioned. Motley Fool has and recommends positions at Apple and Nvidia. Motley Fool recommends the following options: long calls in March 2023 worth $120 on Apple and short calls in March 2023 worth $130 on Apple. Motley Fool has a disclosure policy.