Stock splits have become trendy on Wall Street. Artificial intelligence (AI) giant Nvidia recently executed a 10-for-1 split, and fellow chip company Broadcom announced its own 10-for-1 split for min-July. Both splits launched shares to record highs.
Super Micro Computer (SMCI 7.12%) has ridden AI tailwinds over the past 18 months, but this stock is still on par with where it traded in mid-February. Maybe now is a good time for the company, which has yet to split its stock, to announce its first-ever stock split.
Here are the potential implications of a stock split that investors need to know about.
Here is what stock splits do (and don't do)
Not many things grab investors' attention like a stock split does. The attention can boost sentiment toward a stock and drive share prices higher. Nvidia's stock price is up 37% since announcing its stock split in May, and Broadcom's stock price jumped 16% since the announcement earlier this month.
But what exactly is a stock split, and what does it mean for the stock and investors?
A stock split is exactly what it sounds like. It increases the supply of shares by dividing the stock into smaller pieces. Suppose Nvidia was trading at $1,000 per share at the time of its split. A 10-for-1 split would mean that a $1,000 share would become 10 shares worth $100 each. Investors like stock splits because they lower the share price and make accumulating shares easier. Company employees often receive company stock as part of their compensation. They like stock splits because the lower share price allows them to liquidate their equity in smaller increments.
In other words, stock splits make buying and selling stock easier for investors and employees.
Notably, the share price is lower because each share represents a smaller stake in the company. A split does not change the stock's valuation or any fundamentals about the company. It's like slicing a pizza: More pieces mean more people get some, but the slices are smaller because the whole pizza remains the same size. A split doesn't make a company worth more or less.
Why a split makes sense for Super Micro Computer
Look up the history of most successful companies, and you'll likely see at least a couple of stock splits. Supermicro, as it is also known, is undoubtedly a successful company -- shares have risen over 10,000% since its IPO in 2007. Every $100 in company stock back then is worth over $10,000 today.
Just imagine how much wealth long-term employees could be sitting on!
It makes a lot of sense to split Supermicro's stock and give employees some much-needed liquidity to better control how much stock they may want to cash in. Investors could benefit, too. Shares are almost flat to where they traded four months ago. The added attention of a stock split might help shares get out of this rut and continue their march upward.
Should investors buy the stock before a potential split?
Investors shouldn't buy a stock solely because of a potential stock split. Ultimately, a company's fundamentals will play the most significant role in how a stock performs over time. Fortunately, Supermicro's fundamentals are strong and could support a potential move higher.
Shares trade at an elevated forward price-to-earnings (P/E) of 39. However, analysts expect massive earnings growth averaging over 50% annually over the next three to five years. The need for Supermicro's modular server racks to quickly deploy AI data centers should continue to boost Supermicro's top and bottom lines. At that pace, the stock's current valuation would be a bargain.
Supermicro's explosive growth potential seems to have investors poised for stellar long-term investment returns. A stock split might be the much-needed catalyst to get the party started.
