Stock splits don't change the fundamentals of a business, yet they have caught the attention of investors lately. By increasing the number of shares and lowering the price per share, companies make investing more psychologically appealing and accessible. This can sometimes lead to substantial valuation gains, although it’s not guaranteed. Nvidia, for example, underwent a 10-for-1 stock split in June, but its shares are now trading below the closing price on the day of the split.
While Nvidia’s comeback is possible, diversifying your portfolio with other stock-split opportunities can be beneficial. Here, two Motley Fool contributors highlight why Super Micro Computer and Williams-Sonoma could be better buys. Super Micro Computer presents a contrarian investment opportunity with potential big payoffs. Keith Noonan notes that the company, which specializes in server technologies, has seen volatile stock prices.
While demand for AI processing boosted its share price earlier this year, a recent tumble followed disappointing gross margins and a negative short report from Hindenburg Research, leading the company to delay its annual 10-K report filing. Despite this, Supermicro's stock remains up approximately 37% year to date but has seen a significant decline from its peak. Even with this setback, the stock is set for a 10-for-1 split on October 1, making it an attractive option for risk-tolerant investors.
Supermicro’s growth in fiscal 2024 has been striking, with annual sales up 110% to $14.94 billion and non-GAAP earnings per share rising 87% to $22.09. Strong momentum is expected to continue, with the company guiding first-quarter fiscal 2025 sales between $6 billion and $7 billion, representing a 207% year-over-year growth at the midpoint. Adjusted earnings per share are projected to be between $6.69 and $8.27, marking a 118% surge at the midpoint.
Trading at just 11.3 times this year’s expected earnings, Supermicro’s valuation appears cheap, especially considering the company’s reaffirmation that no material revisions are expected for its previously reported sales and earnings once the delayed 10-K is filed. This dramatic valuation pullback could offer a worthwhile entry point ahead of its stock split. Jennifer Saibil points out that Williams-Sonoma remains a strong investment despite recent fluctuations.
A stock split in July, following a 136% gain in one year, only bolstered the company’s favorable outlook. However, its stock dropped about 10% post-split due to a lackluster earnings update. This should not deter investors as these are short-term setbacks. In its first-quarter earnings report, Williams-Sonoma showed robust profitability despite declining sales, and this trend continued into the second fiscal quarter. Although revenue and guidance fell below analyst expectations, the positives include better margins and an 11% increase in earnings per share.
In a challenging market environment, Williams-Sonoma continues to attract affluent customers, although even their spending has tapered due to inflation fatigue. The housing market downturn also affects the company, as it sells mostly non-essential, high-end goods. A potential reduction in interest rates by the Federal Reserve could provide a boost, enhancing both business operations and stock performance. Currently, Williams-Sonoma’s stock trades at a price-to-earnings ratio of 16, a bargain compared to Nvidia’s 50, and it pays a dividend, making it a value buy as the market conditions improve.
