Companies will commonly split their stock after a strong run-up in price. While it doesn't change any of the underlying fundamentals of the company, it's a strong signal from management that it believes the stock will continue moving higher. As a result, many investors buy shares immediately following a stock-split announcement and continue to buy well after the split executes.
But there's more to be gained by focusing on the businesses executing at such a high level their stocks can't help but increase in price to the point where it makes sense for a split. They can reward shareholders whether management decides to split shares or not. If a split does materialize, that could add some extra momentum to the stock price, helping to make for a great year of returns.
Meta Platforms (META -0.73%) and Microsoft (MSFT -0.15%) have seen their share prices climb 677% and 797%, respectively, over the last decade. Neither has split its shares in that time and their share prices now stand firmly in the mid-three figures. Considering the outlook for both businesses and their current stock valuations, a stock split could make sense for both of them in 2025.
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Meta Platforms: Up 677% from January 2015
Meta has undergone a significant transformation over the past decade. In fact, it wasn't even called Meta Platforms in 2015. Back then it was known as Facebook, the name of its flagship social media application.
Since then, it's gone on to invest tens of billions of dollars in virtual and augmented reality and artificial intelligence. And while the former hasn't produced significant growth for the business, the latter has been instrumental to its continued success. Meta generates almost all of its revenue from advertising sales on its social apps. AI has helped grow that revenue in a few different ways.
Better algorithms have helped surface more interesting content for users, keeping them engaged longer, creating more opportunities to show them ads. Recent advancements in AI have enabled Meta to develop a generalized recommendation engine for use across multiple formats like posts, photos, videos, Stories, and Reels. And the broader Meta makes its recommendation algorithm, the more effective it becomes.
There's still room for improvement in 2025, which should translate into further increases in engagement. That algorithm can pull double duty in ad targeting for marketers. Meta is uniquely capable of taking a marketer's campaign goal and maximizing its budget by showing ads to the right users at the right time.
Meta's innovations around generative AI with its Llama large language model have opened the door for more advanced ad campaign tools. Creating and testing multiple iterations of a single ad is significantly easier for Meta advertisers, which makes ads on Facebook and Instagram far more effective. CEO Mark Zuckerberg sees generative AI getting to the point where a marketer can tell Meta its business objective and budget, and AI will take care of the rest.
Meta is certainly spending heavily to make those improvements. Capital expenditures will come in between $38 billion and $40 billion for 2024, and management expects a big step up in spending in 2025. But the strong revenue and earnings growth points to the value that spending is creating. Meta saw a 22.5% increase in revenue through the first nine months of 2024, which supported a 66% increase in earnings per share.
Meta's share price has merely kept up with its earnings growth over the past year. As a result, it trades for a very reasonable forward P/E ratio of 23.4 as of this writing. With shares trading around $600, a stock split might make sense for the company especially given the strong outlook for growth and current valuation.
Microsoft: Up 797% from January 2015
Microsoft has been a stalwart of personal computing, but it has also transformed into an AI leader over the last few years. It added $10 billion to its investment in OpenAI in early 2023, which vaulted the company's cloud computing division, Azure, to the forefront of the competition in winning new customers focused on AI.
Azure revenue has accelerated recently as a result of strong demand for its AI services. After 33% growth in the first quarter of fiscal 2025, management suggested revenue could grow even faster in the back half of the year for the cloud provider. That's because Microsoft made significant capital investments in 2024, but there's a lag between when it buys compute infrastructure and leases data centers and when those servers come online. Management assured investors it's seeing plenty of demand to keep up with its growing supply.
As such, Microsoft plans to spend even more in 2025 to build out its data centers. The company put out a statement at the start of January that it will spend roughly $80 billion on AI-enabled data centers in fiscal 2025. That's a big step up in investments after spending $55.7 billion in fiscal 2024.
That massive cash outlay is supported by the company's enterprise software business, which remains a cash cow. And it's producing even more cash these days as Microsoft integrates AI into its software in the form of Copilots, its AI agents designed to improve worker accuracy and efficiency.
Copilot adoption is growing quickly with more and more enterprise customers adding it to Microsoft's software development platform, Github, and productivity suite, Microsoft 365. Its Copilot studio allows customers to use their own data to develop custom AI agents for their specific business needs.
Microsoft is at the forefront of AI in two domains: cloud computing and enterprise software agents. Both are poised to grow significantly over the next few years, and Microsoft is one of the few companies with the cash needed to invest in order to take advantage of those opportunities. It's no surprise that analysts expect accelerating revenue and earnings growth over the next couple of years for Microsoft.
Shares currently trade for about 31 times analysts' estimates for fiscal 2025 earnings (ending in June). While that's a premium price to pay for the stock, Microsoft is worth a premium price. The strong free cash flow supports massive investment opportunities as well as a robust capital return program that makes holding shares very rewarding. With a stock price above $400, Microsoft could be in line for a stock split in 2025.
