In 2025, Consider Investing Heavily in Two Stock-Split Companies to Profit, but Steer Clear of One
In the past two years, Wall Street's bulls have been on a wild ride, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite rallying by 13%, 24%, and 30% respectively. While the artificial intelligence revolution is often credited for these stellar performances, it's important to acknowledge the role that stock-split euphoria has played in lifting the fortunes of some prominent businesses.
A stock split is a tool used by publicly traded companies to change their share price and outstanding share count without affecting their market capitalization or operating performance. In 2024, more than a dozen high-profile companies underwent stock splits, and all but one were of the forward variety. This type of split aims to reduce a company's share price to make it more affordably priced for everyday investors who can't buy fractional shares through their brokers.
Two no-brainer stock-split buys for 2025 include Sirius XM Holdings and Sony Group. Sirius XM, the only prominent business to have completed a reverse split in 2024, addresses one of its biggest competitive advantages: its revenue generation. While the majority of net sales comes from subscriptions, only around 20% comes from advertising, making Sirius XM less vulnerable during economic downturns. Furthermore, the company has a legally operating monopoly on satellite radio and a low valuation, with a forward P/E ratio of 7.5 and a dividend yield creeping closer to 5%.
Sony Group, a leading electronics colossus based in Japan, completed a 5-for-1 forward split in October. Reducing the company's share price to under $20 made it more affordable and accessible to a wider investor base. Sony's PlayStation 5 console has helped the company increase its prices and emphasize its subscription-based PlayStation Plus service. Moreover, Sony is a leading supplier of image sensors, with strong subscription pricing power and an attractive valuation.
However, one highflier to be wary of is MicroStrategy. The company completed a 10-for-1 forward split in August, driven by CEO Michael Saylor's acquisition of Bitcoin. Initially seems promising, but the excitement surrounding MicroStrategy is worrisome. History shows that leverage-driven investments rarely succeed, and MicroStrategy must continue selling its common stock to buy Bitcoin without affecting the price of Bitcoin. Furthermore, the company's AI-inspired enterprise analytics software segment struggles to generate enough operating cash flow to service its debt, and Bitcoin's volatile nature makes this strategy risky. Overall, MicroStrategy is being valued at an inexplicable premium to its Bitcoin assets.
In 2025, investing in affordably priced companies like Sirius XM Holdings and Sony Group might prove beneficial, given their favorable financial positions and potential for growth. Sirius XM completed a reverse split in 2024 to improve its competitiveness, with a low valuation and strong revenue sources, making it less vulnerable during economic downturns. Sony Group, after reducing its share price through a 5-for-1 forward split, is more accessible to a larger investor base, benefiting from increased sales of its PlayStation 5 console and the growth of its subscription-based services.
In contrast, while MicroStrategy's 10-for-1 forward split in 2024 was driven by the CEO's Bitcoin acquisitions, the resulting euphoria around the company is a cause for concern. The company's reliance on selling common stock to buy Bitcoin and its struggles to generate sufficient operating cash flow to service its debt make it a high-risk investment, despite its AI-inspired enterprise analytics software segment.
As we approach 2025, it's crucial to make informed decisions when investing in stocks, considering factors such as financial health, competitive advantages, and market trends, including stock splits and the impact of artificial intelligence.
Regardless of the company, it's essential to maintain a diversified investment portfolio and avoid overly leveraged investments, to minimize risk and maximize long-term financial gains, especially with the average investor targeting a horizon of 2025.
