Rising stock prices in the past year and a half have made it easy for many companies to justify deploying stock splits. While stock splits don't really change anything for investors, they can often generate excitement about a stock. They provide some good press around a stock since, after all, a company will normally use a stock split if it has been performing well and it can maintain a reasonable share price after the split.
Recently, MicroStrategy (MSTR +5.63%) jumped into the excitement around stock splits, announcing that it will split its shares on a 10-for-1 basis effective August 1. It has been a strong year for MicroStrategy thus far, with shares of the analytics company up by more than 180% since January. Can the stock split help lift the stock even higher in the second half?
NASDAQ: MSTR
Key Data Points
Stock splits this year haven't resulted in big boosts for big-name stocks
A stock split shouldn't really have a significant effect on a stock's future performance. The business' fundamentals remain the same, and aside from being able to own more full shares of a stock, there really isn't a big difference for investors. A $10,000 investment in a company is still a $10,000 investment after a stock split. Investors will just own more shares of the company -- at a reduced price.
A few popular stocks have split their shares this year, and it hasn't always resulted in a big wave of bullishness.
| Stock | Date of Split | Opening Stock Price After Split |
Closing Price as of July 23 | Return |
|---|---|---|---|---|
| Chipotle Mexican Grill | June 26 | $65.88 | $52.55 | -20% |
| Nvidia | June 10 | $121.77 | $117.93 | 0.6% |
| Walmart | Feb. 26 | $59.64 | $70.75 | 18% |
Data source: Yahoo! Finance.
Big-box retailer Walmart performed well since its stock split, but it has arguably been at a much more tenable valuation for investors than Nvidia and Chipotle Mexican Grill, which often trade at significant premiums. It's possible that as the year goes on, Nvidia and Chipotle will rally and rise in value. But investors who are hopeful that a stock split alone may lift MicroStrategy's stock could be in for a disappointment, as it's by no means a surefire way to generate strong returns.
Bitcoin may play a much larger role in MicroStrategy's performance
Investing in crypto has been a big part of MicroStrategy's operations. When it last reported earnings in April, it said it owned 214,400 bitcoins, making it the largest corporate holder of Bitcoin. Given its bullishness on the cryptocurrency, it may be more likely that Bitcoin's performance affects MicroStrategy's stock price more than the company's stock split.
Historically, the two have often moved in the same direction.
While MicroStrategy has been a bit more volatile and has generated stronger returns than Bitcoin in the past few years, there appears to be a correlation between their price movements. And with such a large holding of bitcoins, changes in the digital currency's value can have a significant effect on MicroStrategy's bottom line.
Digital asset impairment losses saddled the tech company with $191.6 million in expense last quarter (which ended on March 31) -- that's more than the $115.2 million in revenue that MicroStrategy reported for the period.
Should you buy MicroStrategy stock?
MicroStrategy has been an exceptionally good buy this year, but without the rise in Bitcoin's valuation, it's questionable how strong the gains would be if the digital currency were struggling. In 2022, when Bitcoin fell by 65%, MicroStrategy's stock crashed by 74%.
While MicroStrategy's business focuses on business intelligence software, the significant exposure it has to crypto, and the effect that can have on its share price, are undeniable. MicroStrategy is a risky stock, and investors shouldn't assume that a stock split will set it up for strong gains in the second half. Given the company's lack of profitability and soaring valuation, this is a stock I'd steer clear of, as MicroStrategy is proving to be a highly speculative investment.
