There is no science to predicting which companies will resort to a stock split and when, but observers can use some clues to make educated guesses. Stock splits help make a company's shares look more affordable. Of course, that's an illusion, since there are also more shares.
Still, the point is that corporations trading at what seem like prohibitively expensive prices are often leading candidates for stock splits. That's the case for MercadoLibre (MELI +0.43%) and Booking Holdings (BKNG +2.15%). Are stock splits in the works for these corporations?
Why stock splits might make sense
Stock splits don't change the fundamental value of a company. If I cut a pizza into six slices and sell you one for $10, or cut it into 12 slices and you buy two for $10, you've gotten the same deal each time. That's more or less what stock splits are, but there are still good reasons for corporations to resort to this move.
First, perceptions matter. A publicly traded company with shares priced at $50 each might attract more people than one whose stock price is $5,000 -- simply because investors feel they're getting something more cheaply, even if the company is valued the same after a stock split as it was before.
Second, there's no ceiling for stock prices on equity markets. A company whose shares already look expensive can become even more so as it continues to perform well. A stock split might reflect that a company's management is bullish on its future performance, so it might have the same effect as CEOs buying more shares of the corporations they lead -- an incentive for some investors to follow suit.
Third, stock splits can generate significant attention from analysts, investors, and the media.
With that out of the way, let's take the cases of MercadoLibre and Booking Holdings one by one.
NASDAQ: MELI
Key Data Points
MercadoLibre: A leader in Latin America
MercadoLibre, the leading e-commerce company in Latin America, has a share price above $2,000 as of this writing. Many companies have split their stocks at less than half these levels. The company is also generating strong financial results and has excellent prospects. In 2024, revenue increased by 37.5% year over year to $20.8 billion, while net income nearly doubled to $1.9 billion.
MercadoLibre has a fintech arm, a logistics business, and a service that allows merchants to create online storefronts. And that's in addition to its core e-commerce platform and advertising business.
The company's ecosystem gives it a strong moat, based on several factors. It benefits from high switching costs -- merchants can't easily leave its platform without risking losing customers.
MercadoLibre also has an entrenched footprint across South America, allowing it to ship packages between many countries. It would take a significant investment to rival the company's position in the region.
The company will continue to perform well and profit as e-commerce grows in South America. So, within a few years, MercadoLibre's share price could increase significantly.
The company has never conducted a stock split. It might do so by the end of the decade, but even if it doesn't, it remains an excellent stock to buy. If you can't afford a full share, you can turn to fractional shares, now offered by many online brokers.
NASDAQ: BKNG
Key Data Points
2. Booking Holdings: Excellent prospects
Booking Holdings has performed well in recent years, after experiencing some pandemic-related headwinds. It provides a wide range of services to travelers -- including plane tickets, accommodations, car rentals, and activities -- via famous brands such as Kayak and Priceline.
Last year was another successful one for Booking Holdings. Revenue grew by 11% year over year to $23.7 billion. Adjusted earnings per share jumped 23% year over year to $187.10, while many other metrics, from free cash flow to gross bookings, also trended upward. And shares are trading around $4,700 each.
Though ongoing volatility might affect Booking Holdings, the company has excellent prospects. One important reason is that it benefits from the network effect (the more accommodations within its ecosystem, the more attractive it is to travelers, and vice versa). Some of its competitors do, too, but Booking Holdings is the leader in its niche and should remain so for a long time.
The company's large ecosystem also gives it access to significant data it can use to train artificial intelligence (AI) models to enhance its business. It released an AI-powered trip planner in 2023 to help prospective travelers simplify the process.
Management sees massive opportunities for AI to improve the business on the top and bottom lines, notably by helping cut costs. That, combined with the fact that travel should remain one of people's favorite activities -- especially in a world where substantially fewer workers are tethered to an office -- all paint a bright future for Booking Holdings.
Booking Holdings conducted a reverse stock split over 20 years ago. It might do a forward one soon, considering how expensive its shares could get. Either way, the stock is a buy.
