Forward stock splits typically follow a significant increase in stock price, which is rarely the case for inferior companies. For this reason, many investors view stock splits as cumbersome indicators of quality. However, investors’ focus should be on the price rise (not the subsequent split).
Shares of Microsoft (NASDAQ:MSFT) And Intuitive (NASDAQ: INTU) increased by 541% and 437% respectively over the last seven years. This price increase qualifies both companies as candidates for a stock split. More importantly, it indicates a competitive advantage that has led to long-term outperformance. Investors should strive to own such stocks.
In fact, Wall Street analysts consider Microsoft and Intuit to be worthwhile investments right now, whether or not they split their shares in the future. Microsoft has a median price target of $475 per share, representing a 22% increase from the current price. And Intuit has a median price target of $720 per share, implying a 15% upside from the current price.
Here’s what investors should know:
Microsoft: 541% return over the last 7 years
Microsoft has two key growth engines in enterprise software and cloud computing. The company has a virtual monopoly in office productivity software (Microsoft 365) and has a strong presence in enterprise resource planning software and low-code development tools. Overall, Microsoft accounted for 18% of commercial software sales in 2023, and the company is predicted to gain its share as generative artificial intelligence (AI) co-pilots become larger sources of revenue in the coming years.
Additionally, Microsoft Azure is still lagging behind Amazon According to Statista, Microsoft was able to narrow the market share difference from 11 points in 2021 to 7 points in 2023. Microsoft’s strength in AI and its strong presence in cloud-based data and cybersecurity solutions could help the company capture more market share in the future. As a matter of fact, Morgan Stanley believes Azure could overtake AWS by 2027.
Microsoft reported solid financial results for its fiscal third quarter (ended March 31). Revenue rose 17% to $61.9 billion, and net income under generally accepted accounting principles (GAAP) rose 20% to $2.94 per diluted share. This strong performance was driven in large part by momentum in cloud computing, driven by demand for AI services. CEO Satya Nadella said more than 65% of Fortune 500 companies use the Azure OpenAI Service, a platform for building custom generative AI applications using OpenAI’s large language models.
In summary, Microsoft has two strong tailwinds as demand for enterprise software and cloud services grows, both of which are reinforced by opportunities to monetize artificial intelligence. As a result, Wall Street expects the company to grow earnings per share at 16% annually over the next five years. This consensus estimate makes the company’s current valuation of 34.4 times earnings seem a bit expensive, but investors looking to own shares should be prepared to pay a premium.
Ultimately, Microsoft stock outperformed S&P 500 over the last one, three and five years, and I think the stock can outperform its current valuation over the next five years.
Intuit: 437% return over the last 7 years
Intuit specializes in tax preparation and accounting software. The company has two well-known product ecosystems, TurboTax and QuickBooks. TurboTax is the most popular tax preparation tool among U.S. consumers, and Intuit is working to better monetize this ecosystem with TurboTax Live, a product that connects users with tax professionals who offer assisted or full-service tax return preparation.
Similarly, QuickBooks is the most popular accounting software among small businesses and self-employed people in the US. Here Intuit has taken a similar path with QuickBooks Live, a product that connects users with experts who offer assisted or comprehensive accounting. Intuit is also committed to providing value to small businesses with related services for financing, marketing, payroll and payment processing.
Intuit looked strong in the second quarter of fiscal 2024 (ending Jan. 31). Revenue rose 11% to $3.4 billion due to impressive momentum in the QuickBooks segment. Meanwhile, non-GAAP net income rose 20% to $2.63 per diluted share. On the earnings call, CEO Sasan Goodarzi provided encouraging commentary on the current quarter. “Although it’s still early in the season, TurboTax Live Full Service is being well-received by customers.” That’s a good sign for the company, as management sees assisted tax preparation as a largely untapped $31 billion market .
As a precautionary measure, note that Intuit faces a potential threat from the IRS’s Direct File program, which allows eligible taxpayers to file federal returns for free. Most analysts don’t think the program is a problem because adoption of free tools has been low in the past. Although the Direct File program is still in its early stages, only 140,000 tax returns were processed in 2024. That represents just 0.1% of the 128.7 million individual tax returns the IRS expects to be filed by the filing deadline.
Looking forward, Wall Street expects Intuit to grow earnings per share at 28% annually over the next five years. In this context, the company’s current valuation of 64.7 times earnings seems a bit expensive, but not unreasonably expensive. Intuit stock has outperformed the S&P 500 over the last one, three, and five years, and I think the stock can outperform over the next five years based on its current valuation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine holds positions at Amazon. The Motley Fool has positions in and recommends Amazon, Intuit and Microsoft. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Potential Stock Splits in 2024: 2 Growth Stocks Up 437% and 541% in 7 Years to Buy Now, According to Wall Street was originally published by The Motley Fool