Large initial public offerings have done well this year. One of them is CoreWeave (CRWV -1.21%), a company that fashions data centers with advanced graphics processing units (GPUs) specifically for running large language models and artificial intelligence (AI) applications. Instead of having to build their own infrastructure, a costly and complex undertaking, companies looking to create and run AI applications can essentially rent the infrastructure from CoreWeave.
Since going public in March, CoreWeave has gone on a parabolic run and is already up 200% to a $59 billion market cap (as of July 25). Could a stock split soon be in the cards?
Understanding stock splits
Stock splits and reverse stock splits are tools used by companies to change the share price of a stock and a company's outstanding shares without changing the market cap. That's crucial for investors to understand. If you own a stock before it undergoes some kind of stock split, you will see the stock price and number of shares you own change, but your equity position will remain the same.
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Stock splits decrease the share price and increase the shares outstanding. They can be a useful way for a company to make the stock feel more attainable for investors if it just went on a big run and now trades for hundreds or thousands of dollars per share.
Stock splits can also boost liquidity. An example of a stock split would be a 2-for-1 stock split. Let's say an investor owned 10 shares of a stock trading at $200 per share, meaning their total equity position amounted to $2,000. In this scenario, the company would exchange two shares for each one the investor owned, so the number of shares the investor owned would double from 10 to 20. But remember, the equity position of $2,000 remains the same, so the new share price would be $100 ($2,000/20 shares).
A reverse stock split does the opposite and increases the share price while lowering the total share count. A common use of a reverse stock split would be if a company is struggling to get into compliance with rules set by the New York Stock Exchange or Nasdaq.
Both exchanges require companies to trade for $1 for 30 consecutive trading days. A reverse stock split could help a company get its stock price above $1 and back into compliance if it thinks it will be able to turn things around and wants to stay on a major exchange. Companies may also use a reverse stock split to increase its stock price up to a level more in line with peers.
Is CoreWeave Next?
CoreWeave has been on a big run, but it's not abnormal to see large AI stocks trading for hundreds of dollars per share, as they've been popular. I suppose the company could conduct a stock split to get its share price down to make the stock more attainable, but I don't see a real need. CoreWeave is a fast-growing company in the AI space, so I suppose if the AI rally continues, the stock could go on another big run, making management once again think about a stock split.
However, this seems unlikely to happen in the near term. According to MarketWatch, only about 74% of CoreWeave's outstanding shares are public right now. That's because several large shareholders are still under lock-up agreements, which is common to see after an IPO and means they aren't allowed to sell their shares for a certain amount of time. Most of the lock-up periods for insiders at CoreWeave reportedly expire in late September, when most insiders will be able to sell shares. Not only will this add liquidity, but it could induce selling pressure as more supply floods the market.
Additionally, CoreWeave does not appear to be at any risk of breaching compliance rules with the Nasdaq, with its huge market cap and a share price over $120, as of this writing.
