Advanced Micro Devices (AMD 0.06%) has split its stock six times since its IPO in 1972. If you had invested $10,000 in its initial public offering (IPO) at $15 a share, your 66 shares would have been split into 18,666 shares -- which are worth about $2.24 million today.
But it's been more than 24 years since AMD's last 2-for-1 stock split on Aug. 22, 2000. On the day before it executed that split, its stock closed at $68.88 a share. The split reduced its price to $34.13, and it's rallied roughly 250% since then.
AMD hasn't hinted at another stock split, but it might make sense now that it's trading at around $120 a share. Many other major chipmakers -- including Nvidia and Broadcom -- also recently split their stocks. So should investors expect AMD to finally split its stock again in the near future?
Image source: Getty Images.
What a stock split does and doesn't do
Stock splits often attract a lot of attention, but they don't actually make a stock any cheaper. All they do is reduce the trading price of a security by splitting it into smaller slices. It's like selling a quarter of a pizza for $5 instead of the whole pie for $20. A stock split doesn't alter a stock's price-to-earnings ratio or other key fundamentals, because you're simply comparing a smaller slice of the company to its underlying financials.
Stock splits were more significant when retail investors could only purchase whole shares. But most major brokerages now allow their investors to buy fractional shares with commission-free trades, so it's fairly easy to invest in higher-priced stocks with whatever funds you have available at the time.
Nevertheless, stock splits still generate buzz in the markets because they seemingly make high-flying stocks more affordable. Some retail investors might prefer to buy round lots (100 shares) of stocks which are easier to track than odd lots (with fewer than 100 shares). Stock splits also make options trading more affordable, since each options contract is tethered to 100 shares of the underlying security. For example, a single options contract on AMD at $120 is pinned to $12,000 in shares -- but cutting its stock price in half to $60 would reduce that minimum commitment to $6,000.
Stock splits can also grant companies more flexibility when they pay out their stock-based compensation plans. But unless you're an active options trader or a company employee, stock splits probably won't matter too much in the long run.
What investors should focus on instead
Instead of wondering if AMD will attract some short-term attention with a stock split, investors should focus on its recent growth cycle and long-term catalysts. AMD is still an underdog in the x86 CPU market and the discrete GPU market. But over the past decade, it grew its market share against Intel in the CPU market by developing more power-efficient chips and outsourcing its production to Taiwan Semiconductor Manufacturing.
Intel, which manufactures most of its own chips, repeatedly struggled with delays, chip shortages, and technological blunders. AMD also kept pace with Nvidia in the GPU market and launched powerful data center GPUs for AI-oriented servers. As AMD's core businesses grew, it developed more accelerating processing units (APU) which merge CPUs and GPUs on a single die. It sold those chips to laptop makers and gaming console makers like Sony and Microsoft.
NASDAQ: AMD
Key Data Points
AMD's revenue declined in the first half of 2023 as the PC and gaming console markets cooled off. But in the second half of the year, its revenue rose again as the PC market warmed up and the macro environment improved.
That recovery was driven by its Zen CPUs for PCs, its Epyc server CPUs, and Instinct GPUs for AI servers. Those growth engines offset its declining sales of gaming and embedded chips.
For 2024, analysts expect AMD's revenue and adjusted EPS to grow 13% and 26%, respectively, as it maintains that momentum. For 2025, they expect its revenue and adjusted EPS to rise 27% and 54%, respectively. A lot of that growth should be driven by its data center chips which generated nearly half of its revenue in its latest quarter.
Those are impressive growth rates for a stock that trades at just 24 times forward earnings. Nvidia, which is growing faster than AMD by selling more AI-oriented data center GPUs, has a higher forward multiple of 31.
Is it the right time to buy AMD's stock?
AMD isn't generating as much revenue from the AI chip market as Nvidia yet, but it's a well-balanced play on the secular expansion of the semiconductor market. It should also continue to profit from Intel's persistent woes and market share losses. So while AMD probably won't split its stock anytime soon, I think it's still a great buy at its current prices.
