Since the start of 2024, excitement around the artificial intelligence (AI) boom has significantly contributed to Wall Street’s impressive performance, with all three major stock indexes reaching historic record highs. Yet, it’s not solely AI trends driving this growth; the recent enthusiasm for stock splits has played a vital role as well.
A stock split allows publicly traded companies to realign their share price and total shares available, maintaining their overall market capitalization while potentially influencing investor perception. This adjustment is largely cosmetic, but it can lead to meaningful consequences for companies and their investors.
There are two types of stock splits: reverse splits and forward splits, each serving different purposes. A reverse split typically aims to increase a company’s stock price, often to comply with listing requirements for a major stock exchange. In contrast, a forward split tends to lower share prices, making stocks more accessible to regular investors who may not have the ability to purchase fractional shares.
Historically, reverse splits are associated with companies struggling to keep their share prices afloat, while forward splits are often seen with innovative firms thriving in competitive markets. Unsurprisingly, investors gravitate toward companies executing forward splits due to the optimism surrounding their growth.
Since late January, 13 significant companies have initiated or completed stock splits, the majority of which have been forward splits. Notable firms participating in forward splits include AI powerhouses like Nvidia, Broadcom, and Super Micro Computer. However, one prominent reverse split has captured Wall Street’s attention.
The much-anticipated reverse split of the year relates to Sirius XM Holdings (NASDAQ: SIRI), which recently merged with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group (NASDAQ: LSXMA, LSXMB, LSXMK). This merger aimed to create a unified class of shares, resolving the complexities that arose from having multiple share classes.
As of Sept. 10, Sirius XM completes its merger, which includes a 1-for-10 reverse-stock split that significantly reduces its total share count from over 3 billion to approximately 339.1 million shares. This strategic move wasn’t driven by crisis; rather, it aimed to elevate stock prices from the $3 to $6 range to attract institutional investors who often shy away from stocks below $5 due to perceived volatility risks.
For long-term investors looking for value, Sirius XM is presenting itself as a bargain opportunity among the recent stock split announcements. As the exclusive licensed satellite radio provider, Sirius XM has a unique positioning that lends it strong pricing power within its subscription model, differentiating itself from traditional radio which heavily relies on advertising.
Moreover, Sirius XM’s cost structure benefits from predictable expenses that remain stable despite fluctuations in subscriber numbers, suggesting a pathway for improved profitability over time. Unlike many traditional media firms that see revenues tied to ad spending, Sirius XM’s operations are primarily subscription-based—less than 20% of its revenue comes from advertising, resulting in a more stable cash flow even during economic downturns.
Financially, Sirius XM’s current valuation is attractive for savvy investors: trading at around 8.3 times earnings for the next fiscal year, which represents a remarkable 53% discount compared to its average forward P/E multiple over the past five years. Additionally, with a projected operating cash flow multiple of 5.6—43% below its historical average—Sirius XM exemplifies a rare investment opportunity backed by a sustainable 3.9% yield.
As investors consider their options, Sirius XM Holdings provides a compelling case for those seeking long-term, value-driven investment opportunities in a market that has seen both highs and lows related to stock movements.
Ultimately, when contemplating a $1,000 investment in Sirius XM or exploring other equity opportunities, it’s imperative to conduct thorough research and align choices with personal investment goals.