I vividly remember the summer of 2020, when stock splits were dominating the headlines. That’s as Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) announced splits. The biggest company in the U.S. and the most polarizing company in the U.S. both adding catalysts to the runaway bull market in tech.
Stock splits are quite interesting to watch for market participants, as it doesn’t change the value of the company whatsoever. Apple still generates the same revenue, margin and net income. Therefore, the stock shouldn’t be worth any more or less than it was before the split. The only thing that changes is the share price and the outstanding share count. If the share count is doubled, the stock price is reduced by half. If the share count goes up by a factor of 10, the share price is reduced to one-tenth.
In other words, it’s simple arithmetic. But that’s not what we see in the market.
When the share price goes from $2,436.26 down to down to ~$122 — like Amazon (NASDAQ:AMZN) did after its 20-for-1 stock split — it makes it more attractive for buyers. Whether that should or shouldn’t be the case doesn’t matter. There are studies that show these stocks perform better after the event.
Stock Splits to Watch: Shopify (SHOP)
Starting with Shopify (NYSE:SHOP), this stock has already seemingly had a split of its own. Or at least, that’s the joke that bearish investors have been making with Shopify stock sporting a peak-to-trough decline of 83%.
It’s hard to believe that on Nov. 19, Shopify was hitting an all-time high. Now just a few quarters later and the value has been decimated. Shopify has even traded below its Covid-19 low of $305.30 on several occasions. Bulls are hoping that its upcoming stock split on June 28 will help spur the stock price higher. That’s as Shopify plans to split its stock on a 10-for-1 basis. From current levels, that would leave it trading at around $30.
The hope for investors is that, after this brutal washout, the stock split and ensuing rebound will put higher prices in play. A rally to $100 would be fantastic — more than triple the current price, post-split — even though it would still leave SHOP stock 43% below its post-split high.
Alphabet (GOOGL, GOOG)
Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) is in a slightly different position than Shopify. For starters, it’s a much higher quality business when it comes to its financials. Although a recession would dent its top and bottom lines, it has a war chest of cash and a robust balance sheet. It also has a new $70 billion buyback in play.
Lastly, the stock is down a much more reasonable 30% from the all-time high, which was hit in February. Contrast that with the Nasdaq composite, which is down more than 30% from the high.
Like Amazon, Alphabet is planning a 20-for-1 stock split. However, Alphabet announced its plans for a stock split about a month before Amazon, yet will not actually split the stock price until about a month after Amazon did. It hardly matters though — remember, it’s just arithmetic.
Alphabet announced its plan to split its stock when it announced its fourth-quarter results in early February. The better-than-expected results coupled with the stock split was enough to temporarily fuel Alphabet stock to all-time highs.
Post-split, it may be a way for a high-quality company like Alphabet to make its way into the Dow Jones Industrial Average.
Tesla (TSLA)
Tesla already split its stock once this decade and now it’s looking to do so again. When it happens this time, could it fuel another massive rally in the stock price? It could, depending on the market conditions. Unlike the other stocks above though, this one is a little different as shareholders still have to approve the company’s proposed 3-for-1 stock split.
However, that’s likely to be approved.
Why? Because last time, Tesla announced a 5-for-1 split in mid-August, set to go into effect on Aug. 31, and shares rallied more than 80% into the event. So while stock splits don’t actually change the value of the company, doesn’t mean that they can’t trigger upside momentum.
Of course, in the summer of 2020 the Nasdaq was hitting new highs and in a bull market. Now we’re in the depths of a bear market. We’ll see if Tesla’s planned 3-for-1 stock split times up with a period of bullish momentum in the market. If it does, look out on the upside.
— Bret Kenwell
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Source: Investor Place