While there’s no denying that artificial intelligence (AI) has played an important role in sending the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to respective all-time highs, it’s imperative not to overlook the role stock-split euphoria has had in lifting key components within these indexes.
A stock split is a tool publicly traded companies have at their disposal that allows them to cosmetically adjust their share price and outstanding share count by the same magnitude. These changes are superficial in the sense that they have no impact on a company’s market cap or operating performance.
Since Walmart kicked off stock-split euphoria in late February, more than a dozen brand-name/market-leading businesses have followed in its footsteps and completed a stock split of their own — all but one of which has been of the forward variety.
A forward stock split is designed to make shares more nominally affordable for everyday investors, and they’re almost always undertaken by companies that have a rich history of out-executing and out-innovating their peers.
Since stock-split stocks have a history of outperforming the benchmark S&P 500, investors are constantly on the lookout for the next sensational business that’ll announce a split. Although nothing is set in stone, the following three unstoppable stocks with competitive moats are perfectly positioned to become Wall Street’s next stock-split stocks in 2025.
Meta Platforms
The first industry juggernaut that appears poised to split its shares in the new year is leading social media company Meta Platforms (META). Meta is the only member of the “Magnificent Seven” that’s never conducted a split (it went public in 2012). But with shares of the company briefly topping $600 in October, the ingredients are on the table for Meta’s board to take action.
Meta’s outperformance is a function of multiple factors. First, it attracts more daily active people than any other social media platform. During the September-ended quarter, Facebook, Instagram, WhatsApp, Facebook Messenger, Threads, and the company’s other apps, collectively lured an average of 3.29 billion active users per day! Advertisers are well-aware that Meta offers the best opportunity for their message(s) to reach as many users as possible. Thus, Meta can typically command exceptional ad-pricing power.
To build on this point, ad-driven operating models — Meta generates close to 98% of its revenue from advertising — benefit from non-linear economic cycles. While recessions are a normal and unavoidable aspect of the economic cycle, they’re short-lived. Nine out of 12 recessions since the end of World War II resolved in less than a year. Comparatively, most economic expansions endure for multiple years, which tends to encourage businesses to spend more on marketing over time.
Meta’s cash-rich balance sheet and bountiful operating cash flow are also pivotal to its success. The company closed out September with $70.9 billion in cash, cash equivalents, and marketable securities, and it’s generated $63.3 billion in net cash from operations through the first nine months of 2024. This hearty cash pile allows CEO Mark Zuckerburg to take risks that other social media companies can’t afford to.
For instance, Zuckerberg is aggressively building out Meta’s AI-accelerated data center, as well as positioning his company to be an on-ramp for the metaverse.
Netflix
A second unstoppable stock with a competitive moat that looks primed for a forward stock split is streaming colossus Netflix (NFLXS). Since going public in May 2002, Netflix has conducted two splits: 2-for-1 in February 2004, and 7-for-1 in July 2015. But as of the closing bell on Nov. 19, shares of the company were tipping the scales at $871. This is in the neighborhood of the price point Netflix shares traded at prior to its July 2015 split.
One of the reasons Netflix has been such a phenomenal investment for so long is its first-mover advantages in the streaming space. While legacy media companies like Paramount Global and Walt Disney have been forced play catch-up due to cord-cutting, Netflix has been generating recurring profits for years. The latter closed out September with 282.7 million global streaming paid memberships.
Similar to Meta, Netflix enjoys substantial pricing power. Being a leader in original content, as well as offering one of the largest content libraries among digital media companies, affords it the ability to charge more for subscriptions. This pricing power, coupled with the company’s efforts to crack down on password sharing, has noticeably improved its operating margin.
Additionally, since Netflix has predominantly been a subscription-driven operating model that isn’t dependent on advertising like legacy media companies, it’s better positioned to navigate short-lived downturns in the U.S. economy. This is to say that subscribers are far less likely to cancel their subscription during a brief period of economic turbulence than businesses are to meaningfully pare back their marketing budgets.
Lastly, Netflix’s free cash flow has improved dramatically since the start of this decade. With the company (finally) generating plenty of cash flow, it can reward investors with a steady stream of share buybacks and continually invest in the original content that differentiates it from other media companies.
Costco Wholesale
The third unstoppable stock with a clear-cut competitive moat that looks ripe to become Wall Street’s next stock-split stock in 2025 is warehouse club Costco Wholesale (COST). Costco has completed three forward splits since becoming a public company, but the last occurred all the way back in January 2000. With shares of the company topping $930 on Nov. 19, it looks like a matter of time before its board effects a split to make its shares more nominally affordable for everyday investors.
One of the factors that makes Costco such a great business is its size. It relies on its deep pockets to purchase products in bulk. Buying goods in large quantities reduces the per-unit cost for each item, thusly allowing Costco to undercut mom-and-pop stores, and even nation grocery chains, on price. With few exceptions, Costco offers a value proposition that speaks to cost-conscious consumers.
It also doesn’t hurt that Costco is a consumer staples stock. It provides goods, such as food and beverages, which draw consumers to its stores in any economic climate. Getting people in its doors is a challenge that Costco has effectively eliminated.
However, Costco’s primary advantage is its membership model. The $65 to $130 annual membership Costco charges individuals and businesses accounts for a significant portion of its profit. It also serves as a margin buffer that further allows Costco to undercut local shops and national grocery chains on price.
The final thing to note about Costco’s membership-driven operating model is that encourages customers to remain loyal to its ecosystem. Members paying $65 or $130 for the right to shop at Costco are likely to make it their destination for large purchases — i.e., they’re going to want to get the most out of their membership fee.
— Sean Williams
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Source: The Motley Fool