Super Micro Computer (SMCI 8.89%) has been one of the headline stories of Wall Street's craze surrounding artificial intelligence (AI). The stock price has rocketed more than 1,000% higher over the past 12 months.
That's taken the stock from being relatively under the radar to one of the hottest names on the market. Shares now change hands at over $1,000 each, which presents some problems for investors and employees at the company who are sitting on shares.
The company has never split its stock. Is now the time?
Is Super Micro's success sustainable?
Supermicro, as the company is better known, sells modular computer server systems for data centers. Many companies don't want to design, source the parts, assemble, and manage complex computing systems, so they go to Supermicro for turnkey solutions. Supermicro's management claims it's the preferred choice for customers, pointing to its faster growth compared to the industry.
The numbers seemingly back that notion up. The company's revenue for the quarter ending Dec. 31 grew 103% year over year and is still picking up steam. Management's guidance for next quarter equates to as much as 219% year-over-year growth.
Some influential AI figures, such as OpenAI's Sam Altman and Nvidia's CEO Jensen Huang, have called for trillions of needed investments to support AI over the coming years. It's unclear if actual investments will go that high, but demand for Supermicro's server systems is red-hot today.
Why a stock split makes sense for Super Micro Computer
A stock growing more than tenfold in a year is rare, but it's at least understandable, given the hypergrowth the business is enjoying today. However, the sharp share price increase presents potential problems for company employees and investors.
For investors, it is challenging to fit stocks into a budget when paying over $1,100 for one share. Employees who want to sell some stock must now do so in large increments. In other words, a high share price makes the stock less liquid for all. That's one reason why a stock split can be helpful.
Stock splits lower the share price by increasing the number of outstanding shares. For example, Supermicro could do a 10-for-1 stock split. If shares traded at $1,000 at the time, one $1,000 share would become 10 $100 shares.
Stock splits come with a crucial caveat
The broader market generally cheers stock splits, and it's a good way for a company to get its name in the headlines. However, a stock split doesn't fundamentally change the stock. The split lowers the price, but you're still paying the same valuation for the stock. A pizza cut into more slices is still just one pizza.
In investing terms, each share of stock represents a smaller portion of the company's profits. Suppose Supermicro is making $10 in profit per share of stock. Using that 10-for-1 split example, each share's earnings would be $1. So the share price and earnings per share both decrease proportionately.
Buying a stock that splits is OK, but the take-home point is not to buy a stock because it splits. It doesn't make any real difference at the end of the day.
