Does splitting a stock really change anything?
On the surface, stock splits do not materially affect a stock since 100 shares at $100 per share hold the same value as 200 shares at $50 per share. This is likely why Warren Buffett has never approved a split of Berkshire Hathaway's A shares despite the price now exceeding $550,000 per share.
Nonetheless, such an action could affect a stock on the margins. High share prices tend to mean less investor interest and administrative complications brought about by owning fractional shares.
Those factors could place pressure on companies to approve a stock split, and stocks such as Adobe (ADBE 0.87%), Nvidia (NVDA 6.18%), and MercadoLibre (MELI 3.09%) may want to consider such a decision. Let's discuss how these three stocks could benefit.
This software giant last split its shares in May 2005
Jake Lerch (Adobe): With a price north of $550, Adobe is in desperate need of a split. As already noted, there is a cadre of investors out there (as well as some investing platforms) who are unwilling to deal with fractional shares.
Yet, if history is any guide, investors may need to keep waiting for an Adobe stock split. The company's most recent split came in 2005 -- some 18 years ago. It was Adobe's sixth (others occurring in 1987, 1988, 1993, 1999, and 2000). Since then, Adobe's stock price has increased almost 20-fold, but the company has not pursued a stock split.
At any rate, with shares now trading around $550, the stock price is within a range that often precedes a stock split.
Apple, for example, announced a 4-for-1 stock split in 2020 when its shares were trading near $400/share, meaning an investor could buy one share for about $100 after the split. Tesla, on the other hand, announced a 3-for-1 stock split in August 2022, when shares were trading around $900/share, reducing the cost to own one share to only $300.
Both moves were designed to help retail investors more easily purchase shares of the iconic companies. For Adobe, a similar move would help drive additional interest in a company I've liked for a while. Given the company's best-in-class creative software, its lucrative subscription model, and innovative artificial intelligence (AI) integrations, Adobe remains one of my top picks within the tech sector.
A much-needed stock split would only enhance investor interest in this software powerhouse.
Retail investors might love a potential split for this AI leader
Justin Pope (Nvidia): There's little doubt that AI stocks have become the big market story of 2023. Specifically, Nvidia, which sells high-powered graphics processing unit (GPU) chips, has been a Wall Street darling. Shares are up almost 250% over the past 12 months.
But this story has merit; Nvidia's data center revenue, which accounts for the AI chips used in large computer systems that train and operate AI models, has exploded in recent quarters. Nvidia has an estimated market share of over 70% of AI chips today.
Some researchers believe that AI could be a multitrillion-dollar market by 2030, and Nvidia seems poised to play a significant role in that. Analysts believe Nvidia's earnings will grow by more than 50% annually over the long term.
These high expectations have pushed Nvidia's stock to upwards of $500 per share in recent weeks, which begins to price retail investors out of accumulating stock. Not all trading platforms allow for fractional share purchases, so a stock split would be a potential solution for those looking to own a piece of the business moving forward.
Remember that a stock split will increase the number of outstanding shares to reduce the share price. Fundamentally, Nvidia's stock isn't valued differently once it's split, but the improved liquidity and lower share price could benefit retail investors.
This Latin American e-commerce company has an enormous share price
Will Healy (MercadoLibre): MercadoLibre is using synergy to attract the interest of Latin American consumers. This has the attention of investors worldwide. The conglomerate has built a market-leading e-commerce, fintech, and logistics ecosystem that stretches from Tijuana to Tierra del Fuego. Its segments work together and separately to save consumers and businesses money, helping them cope with issues like inflation and logistical challenges.
The huge potential such innovations create for revenue generation helped its stock rise by almost 4,800% since its 2007 IPO.
However, the company's shares have never split, and its price of nearly $1,400 per share has significantly affected its liquidity. MercadoLibre claims an average daily trading volume of around 550,000 shares on the Nasdaq Exchange. Still, its shares attract fewer sales than its Southeast Asian counterpart, Sea Limited. At under $40 per share, it claims an average daily volume of approximately 9 million shares.
Worse, the U.S. market may be the least of its liquidity worries. Its share prices in Argentina and Brazil appear more within reach of average investors.
But on the Mexican Bolsa, Mexico's primary stock market, its price is approximately 24,000 pesos per share, a level closely approximating its U.S. price. Even though Mexico is MercadoLibre's second-largest market, its average daily share volume in that country is only around 400 shares!
This is likely because 24,000 pesos closely approximates the average monthly income in Mexico, according to the OECD, leaving few Mexicans with enough available liquidity to purchase shares.
And given the company's financial performance, a lower share price could attract more buyers. In the first six months of 2023, revenue of $6.5 billion rose 33% compared with the same period in 2022. MercadoLibre also reported net income of $463 million in the first half of 2023. That means earnings rose 146% over the same period, a factor that could persuade investors to buy despite a forward P/E ratio of around 70.
Admittedly, with the stock up by around 65% this year, MercadoLibre seems to take this challenge in stride. However, a stock split could attract more interest in the U.S. and Mexico, giving the internet and direct marketing retail stock an added boost that could further increase investor returns.
