The stock market has started to recover from the doldrums of 2022. The S&P 50 index is up 14% year to date, and the tech-heavy Nasdaq Composite index has gained 30% over the same period.
This return to rising stock prices is likely to inspire another round of stock splits, following the high-profile splits of Amazon, Tesla, Alphabet, Nvidia, and Shopify in recent years. It's true that most of those fell during the inflation crisis, but they all followed long winning streaks for their stock prices.
Stock splits are not business moves of earth-shaking significance. They don't create new revenue streams, widen a company's profit margins, or materially change its market capitalization. They just cut the same pie into a larger number of slices -- the total value of the shares you hold the day before a split will be about the same as the value of the larger number of stock stubs you'll own afterward.
Yet these exercises in mathematical acrobatics aren't completely pointless.
- When a company has a larger number of lower-priced shares outstanding, that can boost the stock's liquidity, which makes the market more efficient overall.
- After a split, the stock looks more affordable at a glance. Despite the widespread availability of fractional shares, we are all human, and it just feels more substantial to buy 100 shares of a company instead of 10, even if the total value of the investment is the same.
- Most of all, a stock split signals confidence from the company's board of directors. The underlying idea is that share prices are high and rising, and should continue to increase in the long run, so it's time to reset the effective market price to a more reasonable level.
On that note, here's why it wouldn't surprise me to see Microsoft (MSFT -1.48%) announcing a stock split someday soon.
This potential split has been a long time coming
Pop quiz: When was the last time Microsoft executed a stock split?
The answer is, 20 years ago. The company is no stranger to stock splits, having performed nine of them over the years, but the latest one took place all the way back in February 2003.
A lot has happened since then. That 2-for-1 split lowered Microsoft's stock price to just under $25 per share at the close of the day it took effect. The stock set a fresh all-time high of $351 earlier this month. That's an approximately 1,280% price gain, or a total return of 2,130% if you reinvested the dividends in more Microsoft stock along the way. By comparison, the S&P 500's total return over the same span was 684%.
Is this stock begging for a lower price yet?
Historically speaking, Microsoft is way overdue for a split-powered price correction. The average share price before the nine splits between 1987 and 2003 was $120, and the moves always left the price in double-digit territory. Microsoft's asserted motivation for the 2003 move was to make the stock "more accessible to a broader range of investors," a common theme in stock split announcements.
If Microsoft followed Nvidia's recent lead with a fairly calm 4-for-1 split now, that would get the stock back under $100 based on today's prices. Then again, the stock has been soaring thanks to its leadership in the red-hot artificial intelligence market, so it might make more sense to go with a more ambitious ratio. The 20-for-1 splits of Alphabet and Amazon spring to mind.
No need to wait for that long-awaited split, though
If you want to invest in Microsoft's AI-driven business prospects, there's no need to wait for a stock split. These math tricks only play a psychological role, especially since most online stock brokers are happy to sell you fractional shares.
Feel free to do your own homework on the company and its stock, of course, but I like Microsoft's long-term value right now. With or without a stock split, it is a robust sector leader with a surprisingly flexible business plan under CEO Satya Nadella, and the stock looks like a great buy-and-hold investment today
