The COVID-19 pandemic strained world economies and devastated many small businesses in 2020. But a handful of companies benefited from shifting consumer behavior and accelerating macro trends. One such company was streaming-TV platform Roku (ROKU 3.51%). As you might expect from a booming business, Roku stock is up over 450% from 52-week lows hit back in March.
As of this writing, Roku stock is trading over $356 per share. Could the company consider splitting its shares now that its price is getting so high?
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Famous splits in 2020
Investors are acutely aware of stock splits these days, thanks to two famous splits from earlier this year. On July 30, Apple (AAPL 2.15%) announced a 4-for-1 stock split. Then on Aug. 11, Tesla (TSLA 0.88%) announced a 5-for-1 split.
Since those announcements, Apple and Tesla stocks have crushed the market.
When it announced its stock split, Apple was trading around $385 per share. For its part, Tesla traded around $1,375 per share when it announced its split. Both of these stocks cost more per share than Roku right now. But to be clear, there's no prerequisite price for triggering a stock split. A company can choose to split at any time.
For example, a less famous 2020 stock split was composite-decking company Trex. It split when it was trading for only about $145 per share, less than half of the stock price where Roku trades right now.
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The skinny on stock splits
There are two kinds of stock splits, a forward split and a reverse split. Forward splits are generally looked upon by investors as a positive development and reverse stock splits are generally frowned upon by investors. In Roku's case, the idea would be for it to initiate a forward split, which would reduce the price for each share of Roku stock. But investors should understand that only the price per share changes with stock splits; the company's value does not. A large pizza is still a large pizza whether you choose to slice it into four, eight, or 16 pieces.
In days of investing yore, brokerage accounts that were the main way for retail investors to trade in stocks had minimum-balance requirements, charged exorbitant trading fees, and offered investors no choice but to purchase whole shares in companies. It used to be, companies would implement forward splits to allow a broader range of would-be investors to purchase their stock. Nowadays, zero trading fees and fractional shares have made stock splits almost irrelevant; retail investors can invest any dollar amount at any time in just about any company.
Let's say you only have $100 to invest. Before, Roku's current price meant it wasn't accessible to you as an investor. Now, you can invest it all in Roku stock by purchasing a fractional share. Not all brokers allow for this option, but more and more of them are in order to remain competitive. So there's no need to wait for Roku to split its stock if you can't spare $350 to buy a whole share right now.
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The case for a Roku split should get stronger in 2021
There are sometimes other lesser-known motivations for a forward split, but whatever the reason, many companies still feel a need to split their stocks as the price per share rises. As such, the case for a Roku split got stronger in 2020. And it will keep getting stronger in 2021 because the price is likely headed higher.
There are three reasons it is likely to rise in 2021. First, Roku provides an alternative to traditional linear TV, and the shift away from linear TV is speeding up. According to Statista, there are still more than 80 million households in the U.S. with linear TV (like cable). These households are cutting the cord at an accelerated rate, and the trend is expected to continue. Even John Stankey, CEO of AT&T (which has a vested interest in linear TV), recently said households with linear TV could keep falling until there are only 55 million to 60 million left.
Second, advertising dollars are shifting to connected-TV (CTV) platforms. Jeff Green, CEO of advertising technology company The Trade Desk, explained why when he said, "Advertisers have to focus on ad opportunities that are measurable and comparable, where the business [return on investment] can be understood and proven." This is confirmed by eMarketer, which found that in 81% of cases, ad agencies are shifting budgets to CTV because it provides better targeting and efficiency. I suspect many brands discovered the benefits of CTV ads for the first time in 2020, and these won't be returning to the old way in 2021.
And third, Roku should be a primary beneficiary of the previous two points. Consider that 1-in-3 smart TVs in the U.S. comes loaded with Roku's operating system. And consumers are very likely to upgrade nonsmart TVs with Roku's external hardware because of its affordability and its recent deal for HBO Max. With HBO Max, all major streaming services can now be viewed through Roku's platform, removing all friction for consumers choosing which platform to use.
As Roku's stock price rises, the case for a split increases. But as we've seen, you might not want to wait for one before investing.
