Last year, the words "stock split" rang out across the market pretty often. Some of the world's biggest and most exciting companies across industries from tech giant Nvidia to top retailer Walmart and fast-casual chain Chipotle Mexican Grill launched these operations -- to the delight of investors.
Why should we love stocks splits so much? It's true they don't change anything fundamental about a company, meaning you shouldn't buy a stock uniquely because it's splitting its stock. But a split is positive because it lowers the price of each individual share, opening up the investment opportunity to a broader range of investors. And such an operation generally is a positive sign from the company itself, suggesting it's confident in the stock's ability to take off once again.
Now the question is: Which stock may be next to launch one of these popular operations? Stocks that have soared in recent times represent great candidates. And one that fits the bill right now is a player that led gains in the S&P 500 last year, surging 340%. I'm talking about artificial intelligence (AI) software player Palantir Technologies (PLTR 3.29%). Could this top stock be next to announce a split? Let's find out.
Image source: Getty Images.
How stock splits work
So, first, let's talk a little bit more about stock splits. As mentioned, companies generally launch them after their share prices have soared over time -- this could be a period of years or a much shorter timeframe. Here's how the operation works. The company will issue additional shares to current holders to lower the price of each share, and the new share price is determined by the ratio of the split.
For example, if a company trading for $1,000 per share launches a 10-for-1 stock split, the stock will trade for $100 per share following the operation. And an investor who owned just one share before the split will own 10 post-split.
This doesn't change valuation, market cap, or even the value of your investment if you're a current shareholder. But, as mentioned, a lower per-share price makes it easier for more investors to access the investment opportunity. (Though fractional shares exist, allowing investors to buy a portion of a share, they aren't available through all brokerages -- and some investors prefer investing in full shares.)
Now, let's consider the case for a Palantir stock split. Though Palantir is more than 20 years old, the company hasn't traded for very long on the market. It launched an initial public offering (IPO) in 2020. Palantir's business is software, offering platforms to governments and commercial customers to help them use their data to make decisions and guide their strategies.
Palantir's stock market history
Since Palantir's IPO, the company hasn't yet announced a stock split. For most of Palantir's stock market history, the shares have traded around $25 or less, and through 2022, the stock actually was down by more than 30% from its IPO price.
But as of early 2023, things started to turn around for the tech company, and as of right now, the stock has soared more than 700% from its IPO price to trade for close to $80. This mind-boggling performance has led some investors to question whether the stock is expensive right now, trading for more than 165 times forward earnings estimates. Though a stock split would bring the per-share price down, it won't lower Palantir's valuation, so such an operation won't solve that particular problem.
And Palantir's price is far from the psychological limit of $1,000 per share that could hold investors back from investing in a stock. Even if valuation is OK, some investors still hesitate to buy a stock when it approaches that price level.
NASDAQ: PLTR
Key Data Points
Palantir's growth drivers
Finally, it's important to remember that Palantir, though it's not a very young company, still is in the early days of its growth story thanks to two key drivers. The company launched its Artificial Intelligence Platform in 2023, and demand has been soaring. This, along with recent growth in commercial customer number and revenue from this customer group, should power earnings for many quarters to come.
Palantir at its current per-share price remains generally accessible for investors, and the company's growth could continue to drive excitement about investing in the stock. So, is Palantir ripe for a stock split? Not necessarily. But that could change over time if this hot stock continues to explode higher.
