Stock splits are back in focus once again, after semiconductor giant Nvidia announced during its fiscal 2025 first-quarter report (for the quarter ended May 22) that it intended to split.
Nvidia’s 10-for-1 forward stock split went into effect on June 7. It wasn’t surprising to see Nvidia take this step, even though a stock split is simply a cosmetic move that reduces the price per share of a company in lieu of an increase in outstanding shares. After all, Nvidia stock has climbed a tremendous 727% since the beginning of 2023 thanks to the robust demand for its artificial intelligence (AI) chips.
Nvidia management pointed out that the split has been done “to make stock ownership more accessible to employees and investors.” It’s also worth noting that Nvidia is the sixth S&P 500 company to execute a stock split this year, and Bank of America analysts believe that more splits in the technology arena could be on the way.
This is the reason Meta Platforms (NASDAQ: META), a stock that gained 322% since the beginning of 2023 and has a market cap of $1.29 trillion, could undergo a stock split. Each share of Meta is trading at just over $500, and management may want to reduce the price of each share through a split to make it accessible to more investors, even though the move won’t alter the company’s fundamentals.
It’s worth noting that Meta has never split its stock. It remains to be seen whether management will decide to make such a move. However, it would be prudent for investors to take a closer look at its fundamentals, which won’t be affected by a stock split, as they are going to play a critical role in deciding the stock’s future direction.
Meta Platforms’ solid prospects make the stock an attractive investment
Though Meta’s share price is north of $500, retail investors can still get to invest in the stock through brokers who allow purchases of fractional shares. That’s why it’s important to take a closer look at the social media and digital advertising giant’s business prospects as smaller investors can still buy fractional shares even if there isn’t a split.
Meta operates in the multibillion-dollar digital advertising market, which was worth an estimated $680 billion last year. Last year, Meta’s advertising revenue came in at $132 billion, indicating that its share of the digital ad space stood at just over 19% last year. This year, global digital ad spending is forecast to increase by almost 9% to $740 billion. The good part is that Meta’s growth indicates that it’s gaining more share in this space.
The company’s ad revenue increased 26% year over year in the first quarter of 2024 to $35.6 billion. Meta expects overall revenue to increase to almost $38 billion in the current quarter at the midpoint of its guidance range, which would be a jump of 19% year over year. It’s worth noting that Meta’s revenue increased 11% in the same period last year.
So the company’s digital ad business is gaining momentum, and that’s good news for investors, as the global digital ad market is expected to clock $966 billion in revenue in 2028. A key reason Meta has been gaining traction in this market is its focus on integrating AI tools into its popular applications such as Instagram, Facebook, and WhatsApp.
Its AI tools are meant to help both creators and advertisers using its platforms, and the good part is that its tools are driving an acceleration in growth. CEO Mark Zuckerberg said on the company’s April earnings conference call: “AI has also always been a huge part of how we create value for advertisers by showing people more relevant ads, and if you look at our two end-to-end AI-powered tools, Advantage+ Shopping and Advantage+ App Campaigns, revenue flowing through those has more than doubled since last year.”
More importantly, Meta is continuing to push the envelope in the digital ad market by launching more AI-focused tools. The company recently announced an AI-powered ad program for businesses on WhatsApp, a move that could help it monetize its popular messaging service. Given that AI is expected to account for more than 90% of ad purchases by 2029, according to GroupM, then Meta is doing the right thing by focusing on integrating this technology into its business.
As such, it’s easy to see why analysts are expecting Meta’s earnings to grow at an annual rate of 30% for the next five years, compared with 11% annual growth in the past five.
The stock is worth buying thanks to its valuation
While each share of Meta is priced at over $500, a closer look at the company’s valuation indicates that it’s cheap considering the impressive growth it’s been delivering. Meta stock is trading at 29 times trailing earnings, and 26 times forward earnings. Both multiples are cheaper than the Nasdaq 100 index’s earnings multiple of 30 (using the index as a proxy for tech stocks).
Smaller investors with the ability to buy fractional shares can consider buying Meta irrespective of a split. And those looking to add a potential AI winner to their portfolios would do well to buy Meta Platforms considering its attractive valuation and the potential growth it could deliver in the long run.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
Is This Trillion-Dollar Company About to Join Nvidia in the Stock-Split Club? was originally published by The Motley Fool