For much of the last two-and-a-half years, optimists have been holding the reins on Wall Street. Since bottoming out between late September and mid-October 2022, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all gone on to respectively reach multiple record-closing highs.
Although the heart of this rally lies with the rise of artificial intelligence (AI) and its seemingly limitless long-term ceiling, don't overlook the role stock-split euphoria has had on the investing community.
A stock split is a mechanism that allows publicly traded companies to alter their share price and outstanding share count, all without having any impact on their market cap or underlying operating performance. These purely cosmetic moves come in two varieties.
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Reverse stock split, which aim to increase a company's nominal share price, aren't too popular among investors. Reverse splits are usually undertaken from a position of operating weakness, often with the goal of avoiding delisting from a major stock exchange.
On the other hand, investors typically gravitate to companies completing forward stock splits. This type of split is designed to make a company's shares more nominally affordable for everyday investors who can't purchase fractional shares through their broker. Businesses conducting forward splits are almost always out-executing and out-innovating their peers.
As we spring forward into April, one of these superb stock-split stock stands out as a phenomenal buy, while another is rife with red flags.
The superb stock-split stock that can be bought hand over fist in April: Palo Alto Networks
Among the many brand-name companies to conduct a split last year, the one that stands out in April is none other than premier cybersecurity solutions provider Palo Alto Networks(NASDAQ: PANW). Palo Alto completed a 2-for-1 split following the close of trading on Dec. 13.
Like most tech stocks, Palo Alto hasn't been immune to the recent sell-off in the broader market. Since closing at an all-time high on Feb. 18, shares have retraced by 17%, as of the closing bell on March 28. While its premium valuation won't entice all investors, there are reasons to believe Palo Alto can support an aggressive earnings multiple.
Before digging below the surface, take note of the highly defensive nature of the cybersecurity industry. Regardless of how well or poorly the stock market and/or U.S. economy are performing, hackers don't take a holiday from trying to access/steal sensitive corporate or personal information. This means cybersecurity solutions have effectively evolved into a necessity service in any economic climate. For Palo Alto Networks, it means operating cash flow should remain steady year after year.
Beyond providing a near-basic-necessity service, what makes Palo Alto special is its ongoing shift to cloud-based, AI- and machine learning (ML)-driven subscription services. Shifting its focus away from physical firewall products and toward subscriptions comes with a number of advantages. For instance, orders and cash flow are more predictable and customer retention rates are likely to be higher.
Additionally, the incorporation of AI and ML into software-as-a-service subscriptions is expected to improve its operating margin over time, when compared to selling physical firewall products. In short, Palo Alto is going to enjoy more bang for every dollar in revenue as time passes, which is why it can support a premium price-to-earnings (P/E) multiple.
While Palo Alto Networks' customer count has been steadily climbing for years, what really stands out has been its ability to land the bigger fish with its platformization strategy. During the company's fiscal second quarter (ended Jan. 31, 2025), the number of accounts generating at least $10 million in annual recurring revenue surged 52% year-over-year. Bigger clients validate Palo Alto's AI- and ML-driven cybersecurity solutions, and they're a big boost to sustainable double-digit sales growth.
Lastly, Palo Alto Networks has done a phenomenal job of growing itself inorganically. Management has regularly overseen bolt-on acquisitions, which expand its product portfolio and provide a jumping-off point for cross-selling solutions.
Any meaningful drop in Palo Alto Networks' stock has proven to be a buying opportunity since the company went public in July 2012.
Image source: Getty Images.
The previously high-flying stock-split stock to avoid in April: Super Micro Computer
However, not all stock-split stocks are necessarily going to be winners. Among the many high-profile stock-split stocks of 2024, customizable rack server and storage solutions specialist Super Micro Computer(NASDAQ: SMCI) can be shied away from by investors in April. Supermicro (as the company is more commonly known) completed its 10-for-1 forward split following the closing bell on Sept. 30, meaning it began trading at its split-adjusted price six months ago today.
Super Micro Computer's jaw-dropping gains from early 2023 through the spring of 2024 came courtesy of the rise of AI. Businesses wanting to gain first-mover advantages in the AI arena have been spending big bucks on the data center infrastructure needed to make that happen. Supermicro's customizable rack servers have been a top choice.
To add fuel to the fire, Supermicro's rack servers are incorporating Nvidia's (NASDAQ: NVDA) graphics processing units (GPUs). Nvidia, which completed a 10-for-1 forward stock split of its own in June, is the premier name in AI-GPUs for a reason. Its ultra-popular Hopper (H100) and successor Blackwell GPU architecture are effectively unrivaled in computing speed.
This otherworldly demand for AI-data center infrastructure sent Supermicro's net sales soaring by 110% in fiscal 2024 (ended June 30, 2024). Based on the midpoint of the company's fiscal 2025 revenue forecast, sales are on track to climb by another 63%.
While its fiscal 2024 was impressive, there are two significant concerns for Supermicro stock.
The biggest headwind is that it's lost the trust of Wall Street and investors. In late August, short-seller Hindenburg Research released a scathing report that alleged "accounting manipulation" at Super Micro Computer. Following this report, Supermicro would delay the filing of its fiscal 2024 annual report and fiscal first quarter report for 2025, as well as see its auditor Ernst & Young resign.
Even though an independent internal committee found no wrongdoing or need to restate the company's financials, and Supermicro did, eventually, file its reports with regulators, it has a lot of work to do to rebuild investor trust.
The other issue for Super Micro Computer is that history isn't in its corner. Every next-big-thing investment trend for more than 30 years has navigated its way through a bubble-bursting event relatively early in its expansion process. Investors frequently overestimate the adoption rate and/or utility of next-big-thing innovations, and artificial intelligence doesn't look like the exception to this unwritten rule.
If demand for AI-data center infrastructure tapers with competition for customizable rack servers picking up, it would be a margin disaster for Super Micro Computer.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.
