Investing

Super Micro Computer Stock Split: It's Time for a 5-for-1 Split

Eric Bleeker

Published: March 10, 2024 10:13 pm

Last Updated: March 11, 2024 4:38 pm

Super Micro Computer (Nasdaq: SMCI) has seen its shares skyrocket from about $40 per share in early 2022 to more than $1,000 per share today. With its shares so expensive, a key question is whether or not the company will issue a stock split that brings its per-share price down. 

Let’s examine what other companies in Super Micro’s position have done and the potential benefits of a stock split. My verdict is that the company should split its shares 5-for-1 in the near future, and I’ll provide the full details on why that’s the case. 

Why Super Micro Computer Shares are Skyrocketing 

The reason Super Micro Computer shares are skyrocketing is simple: insatiable demand for servers that can power artificial intelligence works is driving their profits into the stratosphere. 

There is just a single technology stock in the entire S&P 500 that grew its revenues by more than 50% annually in the latest quarter, and that’s NVIDIA (Nasdaq: NVDA). 

With Super Micro Computer being added to the S&P 500 soon, it will become the second-fastest growing technology stock in the entire index. So, you can understand why investors have been rabidly bidding up the stock. Artificial intelligence is the fastest-growing trend in technology and only a single company (NVIDIA) is seeing its fortunes rise with the trend faster than Super Micro Computer. 

Now, whether or not Super Micro Computer deserves this rich of a valuation is the topic for another article, but even if its stock dropped 50%, it would still be trading at more than $500 per share, which is a high share price. 

When Stock Splits Happen 

During the 2010s, many technology stocks let their share prices reach over $500 per share. This included Apple, Google (Alphabet), and Amazon among others. 

However, Apple today is priced at $172 per share, Alphabet at $138, and Amazon at $172. The reduction in share prices in all cases is thanks to stock splits that have made the per-share price of these stocks much cheaper. 

If you’re looking in the AI space, NVIDIA last announced a stock split when it was around $600 per share, to bring its share price back into the $100 to $200 range. With NVIDIA now trading north of $800 per share, the expectation is that they’ll likely issue another stock split in the near future. 

How Big of a Stock Split Should Super Micro Deliver?

When companies issue stock splits, they can do them in a variety of values, whether 3:2, 2:1, or even higher values like 10:1. 

It’s important to note that shareholders’ total value of Super Micro Computer stock won’t be impacted. If you own one share today valued at $1,080 and it splits 10:1, you’d instead own 10 shares valued at $108 each. That’s the same amount of money. 

In the case of Super Micro Computer, I believe a 5:1 split would be in their best interest.

That would bring shares down near the range many other technology companies (AAPL, GOOGL, AMZN, etc.) are trading around. There’s a chance the company could also pursue a 10:1 split or another value (Apple once issued a 7:1 stock split). There’s no exact science for what share price is optimal, but companies generally don’t want their share price significantly cheaper than peers.

If Super Micro Computer did too large a stock split (say, 10:1) and then saw their shares decline dramatically, they could risk being in that position. 

The Benefits of Splitting a Stock 

If you’re looking for the benefits of a stock split, look no further than NVIDIA’s rationale for their prior stock split. In a letter created for shareholders, NVIDIA explained:

“The stock split is intended to make stock ownership more accessible to investors and employees, thus increasing liquidity in the stock. The trading price of the company’s common stock has appreciated significantly in recent years. 

In addition, the company grants equity awards to attract, retain and motivate the company’s new and existing employees. The company believes that the stock price appreciation and the associated reduction in the number of shares of stock provided in equity grants has reduced the perceived attractiveness of employee equity awards, as well as limited an employee’s ability to hold and retain equity on a post-tax basis.”

Both NVIDIA and Super Micro Computer have become very popular with retail traders. That is, individual investors buying stocks on platforms like Robinhood and Schwab. 

While most brokers now allow for fractional trading, stocks are still more appealing when people feel like they own ‘more’ of them. Which is to say, while 1 share of Super Micro at $1,080 is worth the same as 10 shares at $108, people generally like being able to own 10 shares instead.

It makes it feel easier to sell a partial amount, and if someone wants to start by buying $300 worth, you can own 3 shares instead of needing to type in a fraction like one-third of a share. 

It should also be noted that while stock splits don’t add to or subtract from a company’s value in an academic sense, stocks that have split in recent years have often shown strong returns around the time of stock splits. That increased return is likely from added interest from investors who are looking to buy the stock now that its per-share price is cheaper.