Last year, some of the biggest technology companies all made the same decision: They announced stock splits. From Nvidia to Broadcom and Super Micro Computer, the market was ripe with stock-split activity.
Why should we care about these moves? After all, they don't change anything fundamental about a company or its stock. That's true, but they do signal something positive.
The announcement of such an operation suggests a company is confident about its future and the potential for its stock to soar from a new lower level. Stock splits, through the issuance of additional shares to current holders, decrease the stock price. And here's another plus: At a lower price, the stock becomes more accessible to a broader range of investors.
So it's not surprising investors are on the lookout for companies that may launch the next split. And the first place to look for potential candidates is among stocks that have delivered strong performance in recent years. One that qualifies right now is tech giant Oracle (ORCL 3.44%), a player that's climbed more than 200% in five years. Could it be the next to split its stock? Let's find out.
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Why split a stock?
First, though, let's talk a bit more about stock splits in general. As mentioned, they don't change the value of your holding if you're currently a shareholder, or the overall market value of the company. And they don't impact the valuation of a stock either, so even though the stock may look cheaper at its new price, it actually isn't. In fact, a stock split's only purpose is to lower a company's per-share price.
Still, investors might be more inclined to buy a stock for $100, for example, instead of at a pre-split price of $1,000. Certain price levels -- such as $1,000 -- may be psychological barriers, with investors viewing the stock as expensive even if it's not. Some companies recognize this, and as their shares approach such a level, decide to launch an operation.
Finally, the post-split price is determined by the ratio of the split, so a 10-for-1 split, with an original stock price of $1,000, would bring the price down to $100 post-split.
Oracle's string of past stock splits
Now, let's consider Oracle. The company clearly isn't opposed to stock splits, since it's completed 10 of them in the past. And each time, the stock price was considerably lower than it is today. But the last split was quite a while ago -- back in 2000.
Since that time, the stock has soared more than 300%, but most of the gains have come over the past few years as the artificial intelligence (AI) boom took off. Oracle once was most known for its database software, but in recent times, its cloud infrastructure business has been the biggest growth driver. In the most recent quarter, cloud infrastructure revenue jumped 49% year over year to $2.7 billion -- that's after climbing 52% and 45% in the two previous quarters.
Importantly, remaining performance obligations, the value of services still to be delivered to customers, advanced 62% to $130 billion, offering investors reason to be optimistic about the coming quarters. And the company says customer demand has reached "record levels," supporting plans to double data center capacity this year.
NYSE: ORCL
Key Data Points
It's no surprise Oracle's stock price has followed over the past few years, leaving it trading at about $150 today, or 25x forward earnings estimates. Down from more than 30x estimates a few weeks ago, it looks reasonably priced in light of earnings performance and future prospects.
Is another Oracle stock split on the horizon?
Considering all of these points, is Oracle on the road to a stock split? Not necessarily. The stock isn't trading at a level that puts it out of investors' reach, and amid recent declines in tech stocks, investors may easily opt to buy it at today's price. On top of that, Oracle might not immediately make a move to lower the stock price even further after it's already slipped.
And Oracle doesn't need to announce such an operation to generate market excitement about the shares -- its recent gains in revenue and high demand for its services should do that job. Though it may not be reflected immediately in the stock price, it should lift this exciting AI player over the long term.
