In recent years, stock splits have become increasingly frequent on Wall Street, with companies such as Alphabet, Amazon, and Tesla joining the trend. While stock splits may not drastically alter a company's valuation, they can serve a purpose, including enticing more individual investors to buy shares at a lower price.
One tech company that hasn't participated so far is Meta Platforms (META 1.06%), known for Facebook, Instagram, and WhatsApp. But with its shares trading near an all-time high, it could potentially benefit from a split. Let's explore further.
What's a stock split?
A stock split is when a company increases the number of its outstanding shares while maintaining its market capitalization. This means that each existing shareholder receives more shares, but the total value of their investment remains unchanged.
To illustrate, let's say you're an investor holding 10 shares of a company valued at $100 each. If the company decides to execute a 2-for-1 stock split, your holdings would double to 20 shares, and the share price would halve to $50 each. It's important to underscore that a stock split doesn't alter the fundamental worth of your investment; instead, it adjusts the number of shares you possess. In this example, your investment was worth $1,000 before and after the stock split.
Why would a company split its stock?
When a company's stock, such as Meta Platforms, commands a high trading price, it may present a barrier to entry for certain investors. While fractional shares are readily accessible through many brokerage platforms, notable exceptions like Vanguard do not offer this option. In theory, a lower share price could enhance accessibility, potentially boosting demand for the company's shares and thereby increasing its market capitalization.
NASDAQ: META
Key Data Points
Tesla CEO Elon Musk has previously argued that a lower stock price helps a company's ability to both attract and retain talent, whether through equity compensation packages or employee stock purchase plans.
A company's eligibility for inclusion in a price-weighted index -- such as the Dow Jones Industrial Average, which is determined from an average of the share prices of all the companies -- can also be impeded by a higher stock price. As a result, stocks with higher prices, such as Meta, face a lower likelihood of being added, since their share prices could disproportionately skew the index.
Meta has never split its stock before
Meta Platforms has never split its stock since going public in early 2012 at $38 per share. For investors who have held on to their shares since then, the stock has delivered an impressive return of 1,133%, surpassing the benchmark S&P 500's total return of approximately 379%.
Notably, Mark Zuckerberg, the founder and CEO of Meta, had a plan to split Facebook's stock in 2016. This involved creating a new class of shares without voting rights for the general public, which would have enabled Zuckerberg to maintain control of the company while selling his shares to finance his charitable initiatives.
Zuckerberg withdrew that proposal in September 2017, noting that "Facebook's business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more."
