Savvy investors understand the value of a stock split is exactly zero. You’re getting 12 slices of a pizza instead of six or four $5 bills instead of one $20 bill.
So if stock splits are meaningless, why do companies do them and why do investors love them? Usually it comes down to a few factors, none of which affects the underlying fundamentals of the business or whether a stock is a good investment:
- Make the stock more affordable.
- Increase liquidity in trading the stock.
- Indicate management’s bullish outlook for the company.
- Meet stock exchange listing requirements, which usually involves a reverse stock split (rarely a good sign).
Whatever the reason (and often management provides several), the markets tend to like them and many times a stock will get a short-term boost from the announcement. When Nvidia (NASDAQ:NVDA) announced its stock split in May, its stock soared 26% before the split took effect two weeks later.
But if the company isn’t a good investment, it doesn’t matter if it splits its stock or whether you buy before or after the split. So don’t buy a stock just because it announced a stock split. You still need to look at the underlying business.
Below are two companies that will be splitting their stocks in October. Let’s dive in to see whether the companies are worth buying regardless of whether its shares are cheaper or not.
Key Points About This Article:
- Stock splits change nothing about the underlying fundamentals of a company, but investors like them because they tend to signal management’s bullishness about the future.
- Investors still need to perform their due diligence because a company that is a poor investment will still be bad after the value of its stock is artificially reduced.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Super Micro Computer (SMCI)
By the time you read this, Super Micro Computer (NASDAQ:SMCI) may have already completed its stock split. It announced the move when it reported earnings in early August and the split will occur after the market closes on Monday, Sept. 30. Don’t worry if you’re reading this and the split already happened. Remember: it’s the business that’s important, not the artificially altered stock price.
Super Micro Computer is conducting a 10-for-1 stock, its first one since going public in 2007, but shares have already fallen sharply since the announcement. SMCI stock is down 31% and not all of it is due to The Wall Street Journal reporting a Justice Dept. probe of its accounting practices.
The maker of artificial intelligence-optimized computers, servers, networks, storage solutions, and data center workstations has been one of the top-performing companies for the past two years.
Data center demand for its AI infrastructure equipment saw sales more than double in fiscal 2024 to $14.9 billion, and Super Micro is forecasting them to nearly double again in fiscal 2025, hitting $28 billion. Sales are eventually expected to reach $50 billion.
Yet while sales are growing, profit margins are under pressure. Gross margins in the fourth quarter tumbled to 11.2% versus 15.5% in the third quarter and 17% in the year-ago period.
Noted short-seller Hindenburg Research also published a report alleging “glaring accounting red flags,” which was apparently enough for the DOJ to begin a probe of the company.
While AI demand may remain at a fever pitch, investors would do well to hold off on purchasing Super Micro stock until more clarity is achieved, both in the investigation and in the marketplace. Narrowing margins may be a sign a more competitive landscape could be problematic.
Lam Research (LRCX)
Another specialized computer equipment manufacturer is also splitting its stock by a 10-for-1 ratio. Lam Research (NASDAQ:LRCX), which makes etch and deposition tools that allow chipmakers to make denser chips critical for the sophisticated and advanced packaging techniques required by AI, announced all the way back in May it would be splitting its stock. It is expected to be completed after the markets close on Wednesday, Oct. 2.
Lam’s stock has also fallen since the announcement. Shares are down about 14% over the last four months though they are up about 16% from the lows hit last month. The company’s equipment perfectly positions it for significant future growth as the memory and logic chipmaking segments benefit from AI’s proliferation.
It is one of the world’s largest providers of wafer fabrication equipment, and with Lam’s prowess in the memory sector, it should continue grabbing market share. It already owns about three-quarters of the market for extreme ultraviolet (EUV) lithography machines and Lam says its equipment is a $1 billion opportunity per 100,000 wafer starts per month capacity.
Although its stock has doubled since the start of the AI boom in late 2022, LRCX stock trades at just 18 times earnings estimates and two-and-a-half times sales. That’s elevated, but not extremely so. Semiconductor investments over the next few years make Lam Research a buy either before or after its stock split.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
