Numerous companies on Wall Street have begun splitting their stock; splits don't impact the stock's fundamental valuation. They create more shares at a lower price, which is great for retail investors trying to scoop up shares without breaking the bank.
Booking Holdings (BKNG -0.56%) owns and operates numerous travel and reservation websites, including Booking.com, Priceline, and OpenTable. A survivor from the "dot-com" era in the early 2000s, Booking Holdings has steadily seen its share price grow to more than $2,100 per share.
So what makes the company a candidate likely to split its stock, and what do investors need to know? I'll explain everything below.
Image source: Getty Images.
What do investors need to know about stock splits?
Think of a pie that's cut twice to make four large pieces. A quarter of a pie is a lot of food that most people will have trouble eating. So what can you do? You cut it two more times to have eight smaller pieces of pie. Did the pie get larger? No, but because there are more, smaller slices, more people can enjoy some.
This is how stock splits work. Sometimes a company's share price grows so large that fewer investors can afford to invest in the company. Booking Holdings is trading at more than $2,100 per share. Many investors can't afford to buy multiple shares at that price, and some can't even afford a single share.
So a company can exercise a stock split, creating more shares at a lower share price. Like the pie, the company itself doesn't get any larger, so each share of stock now represents a smaller piece of the company. Stock splits help more investors afford shares, make the stock easier to buy and sell, and can sometimes drum up interest in the stock.
Like I said at the top of the page, it's important to remember that the fundamental valuation of the stock doesn't change. The company still earns the same revenue and profits, so a stock split is essentially a cosmetic move; the amount you pay per share decreases because each share represents less revenue and profit.
Why a split might make sense for Booking Holdings
A company should split its stock for the right reason; encouraging investors to blindly bid up the stock is not one of them. It's essential to make sure that a company splitting its stock is fundamentally strong, which means profitable growth.
Booking Holdings has grown its revenue an average of 10% annually over the past decade while growing earnings-per-share (EPS) an average of 3% over the same time frame. However, from 2009 to 2019, revenue averaged 20% annual growth and EPS averaged 27%; the travel business collapsed during COVID-19 and created a disastrous two years for Booking Holdings that skewed its 10-year growth rate.
BKNG Revenue (TTM) data by YCharts.
You can see the impact COVID-19 had on the company in the above chart. Both revenue and net income (bottom-line profit) are coming back and should continue as the travel industry rebounds over the next few years.
Wrapping up
Booking Holdings seems like a strong candidate for a stock split. The business is recovering from arguably the toughest challenge it could ever face in a global pandemic that virtually closed the travel industry.
Meanwhile, the stock's strong growth over the years has pushed the share price beyond $2,100, a hefty price tag that makes it hard for retail investors to participate in the company's success. Investors should consider keeping the stock on their radar for a potential stock split in the future.
