Stock splits were all the rage on Wall Street last year, with companies like Alphabet, Amazon, and Shopify participating in the frenzy. As the stock market cooled off in the latter half of 2023, stock splits became quieter. Still, for some companies that trade at a high price, splitting their stock could make it more affordable to retail investors.
Booking Holdings (BKNG -0.45%), the world's largest online travel agency, is one company that could benefit from a stock split, as it trades for roughly $2,650 per share. Let's explore what happens when a company splits its stock and whether Booking Holdings might do it.
What's a stock split?
A stock split refers to the process in which a company increases the number of its outstanding shares while maintaining the same market capitalization. If a company decides to split the stock you own, the value of your investment will remain unaffected; only the number of shares will be adjusted.
For example, if you own 10 shares of a company at $100 per share, and the company splits its stock 2-for-1, then you will own 20 shares at $50 each.
Why would a company split its stock?
When a stock, such as Booking Holdings, has a high trading price, it can become inaccessible to some potential buyers. Despite the availability of fractional shares through several brokerages, notable ones like Vanguard don't offer this option.
Image source: Getty Images.
Theoretically, if a lower share price enables more investors to afford the stock, there could be an increased demand for the company's shares, leading to a rise in a company's market capitalization.
A higher stock price can also hinder a company's inclusion in a price-weighted index like the Dow Jones Industrial Average. That's because the value of a price-weighted index is determined from an average of the share prices of all the companies. Therefore, a stock like Booking Holdings is unlikely to be added because its high share price would significantly outweigh others and dominate the index.
Will Booking Holdings split its stock?
As a publicly traded company, Booking Holdings has undergone a single stock split, a 1-for-6 reverse split in 2003. In other words, for every six shares of Booking Holdings owned before the split, shareholders ended up with one share after the split.
Going forward, there is no assurance of a stock split for the company. Neither Glenn Fogel, the CEO of Booking Holdings, nor David Goulden, the CFO, have provided any comments on the possibility.
Is Booking Holdings a buy ahead of a potential stock split?
Investing in a company based solely on the potential for a stock split is generally not recommended. The company's financial performance holds far greater significance in determining a stock's long-term prospects. Therefore, it is crucial to assess the recent business performance of Booking Holdings, as well as the guidance provided by its management, to make informed investment decisions.
First, in 2022, Booking Holdings produced an adjusted EBITDA -- a metric used by management that shows a business's ability to generate cash flow for its shareholders -- of $5.3 billion, representing an increase of 82% compared to 2021. The strong results continued into the first quarter of 2023, with the company generating $586 million, an increase of 89% from Q1 2022.
Second, management recently guided for second-quarter 2023 adjusted EBITDA to be roughly 35% higher than last year. And better yet, it expects to produce "a record level of EBITDA in 2023."
If Booking Holdings can hit or exceed management's guidance, expect its stock, which has increased 32% over the past 12 months, to take flight in 2023 and beyond.
