Stock splits are regaining traction among major corporations, with several high-profile companies choosing to execute them in recent years. While the practice was more prevalent decades ago, firms like Nvidia, Broadcom, Chipotle Mexican Grill, and Sony have adopted stock splits to make their shares more accessible to investors. The renewed interest raises questions about the purpose and implications of such actions for both companies and investors. Notably, Nvidia’s 10-for-1 split in June marked a key moment in this trend, although subsequent investor sentiment was impacted more by concerns about chip shipment delays than the split itself.
Why are stock splits gaining relevance again?
Stock splits occur when a company divides its shares to increase their number while proportionally reducing the price per share, leaving the overall market value unchanged. This mechanism enhances stock liquidity and appeals to retail investors by keeping shares affordable. Companies often use stock splits to maintain share prices within a target range and project confidence in future growth. A reverse stock split, on the other hand, consolidates shares to elevate their price and meet stock exchange requirements, often avoiding the stigma of becoming a “penny stock.”
Do stock splits impact investor sentiment?
While stock splits don’t alter a company’s intrinsic value, they often generate excitement among investors. Increased media attention and heightened demand can result in short-term boosts to share prices. For instance, Tesla’s five-for-one split in 2020 spurred a significant increase in its stock value. However, experts argue that the overall long-term effects are mixed, and the impact largely hinges on investor perception. Companies frequently use such announcements to signal optimism about future performance.
Stock splits have been a recurring strategy in corporate history. In 2014, Apple (NASDAQ:AAPL) executed a seven-for-one split, which preceded a rise in its market capitalization above $700 billion. Concurrently, Google (NASDAQ:GOOGL) (now Alphabet) initiated a two-for-one split but saw limited share price movement. On the contrary, Amazon’s two-for-one split in 1999 led to a decline in share value. These mixed outcomes exemplify the varying market responses to stock splits over time.
Upcoming stock splits in February include companies like GlucoTrack, VanEck Environmental Services ETF, and Southern Copper. For example, GlucoTrack plans a 20-for-1 split, and Southern Copper is executing a modest 1.0073-for-1 adjustment. Meanwhile, Amplify’s cannabis ETFs are also undergoing significant reverse splits. These events highlight the broad application of stock splits across different industries, from technology to environmental services and cannabis.
Stock splits are not without risks, especially when done without a clear strategic purpose. Investors should assess whether a split aligns with a company’s foundational metrics, such as profitability and growth prospects, rather than viewing it as a standalone indicator of value. For companies, stock splits can serve as a useful tool to attract investor interest, but their value as a long-term strategy remains debatable. Observing how firms utilize this option in coming years will provide further insight into its effectiveness as a corporate maneuver.
