1: Unique Shares with Split Division, a Thundering Purchase Option in November, and 2 to Steer Clear Of
1: Unique Shares with Split Division, a Thundering Purchase Option in November, and 2 to Steer Clear Of
Although the financial sector has been positively captivated by the long-term prospects of artificial intelligence (AI) -- analysts at PwC estimate AI can contribute $15.7 trillion to the global economy by 2030 -- the frenzy surrounding stock dividends has significantly contributed to Wall Street's major stock indexes hitting record highs in 2024.
A stock dividend refers to an event that empowers a publicly traded company to alter its share price and the number of outstanding shares by the same factor. It's essential to note that these adjustments are solely aesthetic and do not affect a company's market value or its underlying operational performance.
Since retail titan Walmart initiated the trend with a 3-for-1 split in late February, numerous prominent companies have followed suit, with the exception of one, which employed the innovative reverse stock dividend strategy. Reverse stock dividends aim to decrease a company's share price to make it more affordable for ordinary investors without fractional-share buying options through their brokerage.
Numerous "Class of 2024" companies in the stock-dividend category boast market-leading positions, though their growth prospects may vary. As the clocks tick towards November, one notable stock-dividend pick stands out as an incredible bargain, while two others present red flags.
Investors can capitalize on this exclusive provider for long-term gains
Although the majority of investors may gravitate towards companies issuing forward dividends, the only prominent reverse dividend of 2024 is the unique stock that warrants consideration in November. I'm talking about satellite-radio service provider Sirius XM Holdings (SIRI 12.15%), which carried out a 1-for-10 reverse split upon its merger with Liberty Media's Sirius XM tracking stock, Liberty Sirius XM Group, following the closing of trading on Sept. 9.
Firms completing reverse stock dividends typically undertake such actions to avoid delisting from a major stock exchange. The peculiarity of Sirius XM is that it was not in danger of being booted from the Nasdaq exchange. It has, however, experienced a significant swing between $2 and $7 per share for over a decade. As some institutional investors shy away from stocks priced below $5 per share, this move was intended to put Sirius XM back on the radar of Wall Street's leading money managers.
One of the most captivating attractions of investing in Sirius XM lies in its sole legal privilege. Despite competing with traditional radio broadcasters, it remains the only company with a satellite-radio license, bolstering its long-term pricing power for subscriptions.
Another significant differentiator for Sirius XM revolves around its revenue generation model. Traditional and online radio providers primarily generate revenue through advertising. While this model succeeds during prolonged periods of economic expansion, it can pose challenges during downturns when companies reduce their marketing budgets. Sirius XM has managed to garner only 20% of its net revenue through advertising through the first nine months of 2024.
Compared to this, Sirius XM has accumulated approximately 77% of its $6.5 billion in net sales through subscribers in 2024. Subscriptions generate predictable cash flow, as subscribers are less likely to cancel their services during economic turbulence than businesses are to curtail their ad spending at the first sign of an economic downturn.
Lastly, Sirius XM offers an appealing value proposition and a market-leading 4% yield. Shares can be acquired for just 8 times forward-year earnings, marking a bargain compared to its all-time-low multiple over its 30-year lifespan as a public company.
This AI pioneer raises more questions than answers (and that's not a good thing)
Nevertheless, not all stock-dividend picks are worthy investments in November. The first stock investors should avoid is computer server and storage solutions specialist Super Micro Computer (SMCI 1.12%). Super Micro conducted its inaugural split, a 10-for-1, following the close of trading on Sept. 30.
Fairly, there have been numerous positives for the company in the past year. In fiscal 2024, ending June 30, Super Micro recorded a 110% increase in revenue to $14.9 billion, and is expecting revenue to grow to a range of $26 billion to $30 billion in its current fiscal year.
The primary driver behind Super Micro Computer's growth is its customizable rack servers, which incorporate Nvidia's exceptionally popular graphics processing units (GPUs). Businesses eager to leverage AI's potential have exhibited a willingness to invest significant capital in the infrastructure required to support AI adoption.
However, it hasn't been a smooth ride for this highly-valued AI stock. In late August, short-seller Hindenburg Research released a report alleging accounting manipulations on Super Micro's part. Despite the company's denial of these accusations, it has since postponed the filing of its annual report and is reportedly under early-stage investigation by the U.S. Justice Department, as per the Wall Street Journal.
To add salt to the wound, Super Micro is reliant on its suppliers, including Nvidia, to maximize its AI opportunity. With orders for Nvidia's AI-GPUs backlogged, there's a genuine concern Super Micro Computer may miss its full potential.
The valuation premium on this is screamingly obvious to avoid
The second overhyped stock-split stock that wise investors should steer clear of in November, and possibly longer, is AI enterprise analytics software provider MicroStrategy (MSTR 11.56%). MicroStrategy's board announced a significant 10-for-1 forward split in July, which was carried out after market close on August 7.
MicroStrategy's long-standing revenue generator has been its software division, but a substantial portion of its $50 billion market cap is due to its Bitcoin (BTC 0.37%) holdings. As of Sept. 20, the company held 252,220 Bitcoin, which represents 1.2% of all Bitcoin that will ever be mined. However, MicroStrategy's operations approach has three major drawbacks that are difficult to ignore.
The primary reason MicroStrategy can be avoided is the exorbitant valuation premium of its Bitcoin portfolio. Currently, a single Bitcoin is worth $69,362, giving MicroStrategy's crypto assets a value of $17.56 billion. However, Wall Street is valuing the company's Bitcoin at $49 billion, which is generous since it assumes a $1 billion valuation for the company's software division. There is no justification for paying a 179% premium above the current Bitcoin price.
Second, MicroStrategy's method of acquiring Bitcoin seems risky to me. It finances these purchases through convertible-debt offerings. Despite expecting its annual interest expense on its $4.2 billion in aggregate debt to be $34.6 million, MicroStrategy has already burnt through $35.7 million in cash from its operating activities within the first nine months of 2024. Doubts persist over MicroStrategy's ability to service its debt.
To make things worse, MicroStrategy has a plan to raise (hold on to your seat for this) $42 billion in capital over the next three years to buy Bitcoin. It plans to raise $21 billion in stock through ongoing at-the-market offerings, thereby diluting existing shareholders, as well as $21 billion in fixed-income securities.
The cherry on top is that MicroStrategy's only source of operating cash flow, its AI enterprise analytics software segment, has seen its sales decline by double digits over the past decade.
MicroStrategy exhibits all the characteristics of a bubble that is destined to burst eventually.
Despite the positive impact of reverse stock dividends on making a company more affordable for ordinary investors, like Sirius XM Holdings' 1-for-10 reverse split, it's crucial for investors to carefully consider their investment decisions. This is particularly true for overhyped stocks like MicroStrategy, which experienced a significant valuation premium due to its Bitcoin holdings.
It's essential for investors to conduct thorough research and not solely rely on the frenzy surrounding potential returns from AI-focused stocks, as Sirius XM's competitive advantage lies in its legal privilege as the only satellite-radio licensed company and its significant subscription-based revenue generation model.