There have been lots of stock splits this year: Amazon, Alphabet, and Tesla to name just a few. And these are no small potatoes; the combined market cap of these three companies alone exceeds $2.9 trillion.
More stock splits will probably happen next year. And when it comes to tech companies that might split their stock, I have my eye on one name in particular: Adobe (ADBE 0.89%).
Image source: Getty Images.
It's been 17 years since Adobe's last split
Public companies consider several factors before initiating a split: the stock's current price, the size of the split (2 for 1, 10 for 1, or whatever), and how much time has passed since its last split.
For Adobe, it's been a while -- a long while -- since the company did a stock split. The last one was on May 24, 2005. To give you a sense of how long ago that was, Desperate Housewives was a top television drama, and the first iPhone was still two years away from its debut.
So plenty of time has passed, but that's not what's holding up Adobe. Its stock price, on the other hand, might be the problem. Shares are trading around $350 -- give or take a few dollars. That means the company could issue a 2-for-1 split, bringing the share price down to around $175; or it could do a 3-for-1 split, bringing the price down to about $115.
Both options would align Adobe more with the tech mega-caps it aspires to be. Amazon, Alphabet, and Apple all trade between $95 and $160.
Will Adobe do it?
One important thing to remember about stock splits is that they don't change a company's fundamentals. Because of that, there's no reason to buy or sell a stock purely because of a split. In economic terms, it's a nonevent.
However, stock splits can (and do) generate increased interest from retail investors. Companies know this and often use stock splits to ensure that retail investors don't feel priced out of their stocks. But for Adobe, with shares trading for less than $400, it's unlikely most investors feel priced out.
Yet, if the stock were to rally -- perhaps above $500 -- there might be pressure to do a stock split. At that price, many retail investors might balk at spending $500 for only a single share, especially when they could potentially buy four or five shares of Alphabet or three shares of Apple for the same amount of cash.
Is Adobe a buy?
Make no mistake: I think Adobe is a great investment. That said, I don't see a stock split coming anytime soon. I'd love to see the stock rally over $500, but with the Fed hiking interest rates, the overall market environment remains challenging.
Adobe is scheduled to release fourth-quarter earnings next month, and I'll be eager to see how the company performs. I'd love to see strong operating margins and revenue growth after both figures dipped in the third quarter.
For me, Adobe is still a long-term buy, but I'm not holding my breath waiting for a stock split.
