The countdown has begun. The latest tech stock split, from Super Micro Computer (NASDAQ: SMCI), is set to happen in a few days — and the stock will open at its split-adjusted price as of Oct. 1. Supermicro announced a 10-for-1 split during its earnings report last month, joining several other market leaders and big tech players in launching such an operation in recent times. Nvidia, Broadcom, and high flyers in other industries such as Walmart and Chipotle Mexican Grill have split their stock this year.
Companies generally decide on stock splits when their shares have climbed considerably, reaching levels investors may not want to pay, even if valuation remains reasonable. For example, Nvidia and Broadcom shares traded above $1,000 prior to their stock splits, a level that could represent a psychological barrier for some investors.
Now, as the Supermicro operation approaches, you may be wondering if it’s a better idea to get in on the stock right away, prior to the split, or if you should buy once the operation is complete. Let’s take a look at what history has to say.
What a stock split does
First, let’s consider a few more details about stock splits. These operations lower the price of a stock through the issuance of additional shares to current holders. But this doesn’t change the total market value or anything fundamental about the company, so it isn’t a reason to buy or sell a particular stock.
That said, these operations could attract more investors over time because they open the investment opportunity to a broader range of investors. To become a shareholder, instead of paying hundreds or thousands of dollars for one share, you can get in for a much lower price.
Now, let’s look at what recent history shows us about stock performance before and after stock splits. This year, Nvidia soared 27% in the two-week period between its split announcement and the actual operation. Broadcom rose 14% from the time of its split announcement to the completion of the operation about a month later.
Since, the completion of those splits through today, performance has been lackluster, with Nvidia losing 4% and Broadcom little changed.
If we broaden our lens to include companies outside of technology, history shows us that Walmart advanced about 8% from its split announcement to the actual operation and has since soared 32%. Chipotle gained about 2.5% during the few weeks from announcement to split and has since lost about 13%.
All of this shows us investors have usually gained by buying a stock as soon as the company announces a split — but gains may taper off after the operation.
Is history right?
It’s important to remember that history isn’t always right when it comes to predicting the future, and each company’s situation is unique. Supermicro’s stock actually has fallen 25% since the announcement of its stock split — this isn’t due to the upcoming split but to unrelated headwinds. A short report in late August weighed significantly on the stock, and a delay by Supermicro in the filing of its 10-K annual report further hurt appetite for the shares.
And it’s also important to remember that a major gain after the stock split, such as we’ve seen with Walmart this year, isn’t due to the split itself but to a company’s fundamentals. Walmart has reported earnings that have surpassed analysts’ estimates, and the company even raised its forecast for the year.
So history tells us a stock split announcement often is positive for a stock right away, but what sets the long-term trend for a stock is that company’s earnings power and prospects ahead. And this means it really doesn’t matter whether you buy Supermicro stock today or after the split. If you hold on for the long term, a good or bad performance over a period of a few weeks won’t impact your returns by very much.
This is great news for investors because it means you don’t have to rush into an investing decision, timing it around a stock split, and instead have plenty of time to get in on exciting players that could multiply your winnings over time.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Walmart. The Motley Fool recommends Broadcom and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Should You Buy Super Micro Computer Before or After Its Stock Split? Here’s What History Says. was originally published by The Motley Fool
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