Artificial intelligence tailwinds have pushed technology stocks higher; some have begun splitting their stock. AI chip kingpin Nvidia executed a 10-for-1 split in May, while Broadcom announced it will do the same in July.
Although the company doesn't receive as much attention as other AI stocks, ASML Holding (ASML -0.51%) belongs squarely in the mix. The company builds lithography machines, a vital tool for manufacturing chips.
Like other AI stocks, ASML's share price has risen quite steeply. Shares have surpassed $1,000 and are near all-time highs. So, is a stock split in ASML's future?
Here is what you need to know.
This is the most important thing to know about stock splits
Stock splits get a ton of investor attention. After all, who doesn't like lower prices? You see, lowering the share price is what a stock split does. ASML is trading at approximately $1,000 today. Suppose the company executes a 10-for-1 split, like Nvidia and Broadcom have done. Every share trading at $1,000 would become 10 shares trading at $100 each.
The most important thing about a stock split is that it does not change the company's fundamentals.
While ASML's share price would drop from $1,000 to $100 in the above scenario, it's offset by increasing the number of shares tenfold. In other words, it's like cutting a pie. You can cut it twice and give four people large pieces. Or, you can cut it eight ways and give smaller pieces to eight people. The pie wasn't any larger or smaller.
Similarly, any company that splits its stock doesn't change, only how much of the business each share represents.
Why it makes sense for ASML to split its stock
So, why do companies split their stock in the first place, and why does it make sense that ASML do so?
Ultimately, a stock split makes a stock more liquid. In other words, it makes shares easier to buy and sell. More shares at a smaller price means investors can invest in the company without having thousands of dollars. Employees who earn company stock may want to sell shares to free up cash. You can be more flexible when you have 20 shares at $100 each versus two shares at $1,000.
ASML has split its stock multiple times, as you can see below. However, it's been a while. ASML's last stock split occurred in 2007, which was technically a reverse split. The last traditional split happened in 2000, a 3-for-1 split.
Shares have been wildly successful since splitting in 2000. In fact, the stock is up roughly 1,900% since then. There's a good chance that employees who have been with ASML for some time are sitting on pretty big equity positions that are difficult to manage at over $1,000 per share.
Since the company has split in the past, it seems like a matter of time before it happens again.
Should investors buy? Here is your clue
Investors should never buy or sell a stock based on a stock split alone. Ultimately, what's important are a company's fundamentals, like:
- Revenue and earnings growth
- The company's competitive advantage
- Does the stock's valuation make sense?
Investors should consider these factors when choosing what to buy and sell.
ASML appears to be a robust business. Its equipment plays a crucial role in manufacturing semiconductors. It is the world's only supplier of EUV (extreme ultraviolet lithography) machines, which are needed to make the most advanced chips on the market.
Over time, the continued demand for increasingly complex chips to push artificial intelligence forward should benefit ASML's business. Analysts believe the company will grow earnings by an average of 23% annually for the next three to five years. That expected growth makes the stock's current valuation, a forward P/E of 51, a reasonable price for long-term investors.
Strong double-digit earnings growth and a fair valuation mean shares could easily be higher five years from now. Don't be surprised if ASML initiates a stock split at some point between now and then.
