COST

Stock Split Fever Is hitting the Market Again With Walmart's and Chipotle's Stock Splits: These 2 Top Stocks Could Follow

The market loves a good stock split. When a company decides to split its shares, it is a reflection of the company's success and also indicates management's confidence in its future. In other words, it's almost always top stocks demonstrating strong performance that go for stock splits.

The two newest stock-split stocks currently gripping the market are Walmart, whose 3-for-1 stock split went through in February, and Chipotle Mexican Grill, which announced a gargantuan 50-for-1 split last week. Both of these stocks are outpacing the broader market this year.

Will other stocks follow? Costco Wholesale (NASDAQ: COST) and MercadoLibre (NASDAQ: MELI) are two stocks that look poised for stock splits.

The unbeatable membership model

Costco has been a market-beating stock for decades. It has an incredible, unbeatable retail membership model that generates customer loyalty, high traffic, and strong sales. It charges $60 for a basic annual membership, which members more than make up for with their cost savings on their yearly purchases. Costco marks up products, which it sells mostly in bulk, with razor-thin margins to cover costs, and it makes its profits on the fees.

Sales growth was sluggish for most of last year and even headed into negative territory, but that was mostly attributable to shoppers cutting down on large, expensive items. Traffic and volume were up, as was membership.

In fiscal 2024's second quarter (ended Feb. 18), sales increased 5.9% year over year driven by a 5.6% increase in comparable sales and a 5.3% increase in traffic. Earnings per share (EPS) were up from $3.30 to $3.92. Membership fee increased 8.4% to $84 million, and paid household members increased 7.8% to $73.4 million. Renewal rates continue to be sky-high, with Canada and the U.S. at 92.9% and the global rate at 90.5%.

Costco has split its stock three times in the past, and the last time it did was 24 years ago. The stock is up almost 1,500% since then, and it's up 48% over the past year. Each share cost more than $700 as of this writing.

Costco paid a $15 special dividend to shareholders earlier this year, and it's also due for a membership fee hike. Walmart and Chipotle noted their strong performances and continued opportunities in their stock split announcements, and that applies to Costco, too. This could also be the year that it finally splits its stock.

The leader in Latin American e-commerce

MercadoLibre is the top Latin American e-commerce giant, similar to Amazon. Even though it's not so young anymore, it operates in a market that's exploding, and it's still reporting exceptional growth in its e-commerce business. Gross merchandise volume (GMV) increased 79% year over year (currency neutral) in the 2023 fourth quarter.

Like Amazon, MercacoLibre has branched out into new businesses, and these are growing even faster. It has a large fintech business focused on digital payments, and total payment volume (TPV) was up 153% year over year in the fourth quarter. It has incredible opportunities in off-platform TPV, which are payments that aren't made in its own marketplace. Off-platform TPV was up a whopping 182% in the fourth quarter.

As part of the fintech segment, MercadoLibre also operates a fairly new credit business. This is a lucrative undertaking that gives the company tons of cash to fund other ventures and invest for interest income. The credit portfolio increased 33% year over year in the fourth quarter.

Total company revenue increased 83% year over year in the quarter. Net income was negatively impacted by a tax liability in the fourth quarter, but MercadoLibre remains reliably profitable, with $165 million in the fourth quarter.

MercadoLibre has been a public company since 2007, and it has never split its stock. It's gained more than 5,000% in its lifetime and trades with a price tag of $1,540 today. Hitting four digits often leads to a stock split, but MercadoLibre has been in that bracket for some time. Its stock is about flat this year, falling after the fourth-quarter report and the drop in profits.

In contrast to the reasons for the other stock splits mentioned above, a stock split could stimulate greater interest in MercadoLibre stock and signal that management is confident about the future. In any case, this is a great opportunity for investors to buy in before MercadoLibre stock starts climbing again.

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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. Jennifer Saibil has positions in MercadoLibre. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, Costco Wholesale, MercadoLibre, and Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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