In the public markets, companies are always trying to make their stocks more attractive to investors. One way publicly traded companies can do this is through stock splits and reverse stock splits, which are tools that artificially manipulate share price and outstanding share count but don't change the overall value of a company.
While stock splits won't change the performance of a company, they can serve as indicators to the market, which is why investors always seem interested when stock splits are announced. D-Wave Quantum (QBTS 12.22%) is part of the high-flying quantum computing sector, and has seen its stock price fluctuate significantly in recent years. Investors are wondering if a stock split could be on the horizon.
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The most common reasons for a stock split
While it can be difficult to predict exactly when a company will conduct a stock split, there are some common reasons they do them. Understand first that a stock split lowers a company's share price and proportionally increases the outstanding share count. Stock splits do not alter the market cap of a company (which is share price multiplied by number of shares) nor an individual investor's equity position.
Let's say an investor held 50 shares of a stock that traded at $30 per share for a total equity position of $1,500. If a company announced a 3-for-1 stock split, the investor would receive three shares for each one they owned, so the number of shares they owned would triple from 50 to 150. The total equity position remains the same, however, as the stock price would decrease to $10 per share in the split.
Stock splits can be useful for companies that have seen their stocks increase significantly. If the per-share price has risen into the hundreds or thousands, management may want to bring the stock price down to be more in line with peers so it feels more attainable for investors. Stock splits can also boost liquidity.
Reverse stock splits increase share price and lower the amount of outstanding shares. Companies can also use these to get their stock price more in line with peers. They are also frequently used if a company is dealing with compliance issues on the New York Stock Exchange or Nasdaq. On both exchanges, companies risk eventual delisting if their stock price falls below $1 per share for 30 consecutive trading days. If a management team thinks they can turn things around and want to stay on one of the largest, most liquid exchanges in the world, then a reverse split can buy them some time.
Is D-Wave Quantum on stock-split watch?
Quantum computing is the next wave of innovation on the traditional computer, which has radically disrupted society over the past three decades or so. While the foundation of computers is built on bits, the smallest unit of digital information, quantum computers are built using qubits, which can process and solve much more complex problems than a standard computer.
Quantum computers have the potential to solve calculations much quicker and more efficiently than any regular computer and even the smartest of humans, giving them extreme potential to disrupt all industries from finance to chemistry. But most companies haven't perfected the technology just yet, and quantum computers still seem at least several years away from real commercialization.
In May, D-Wave announced the release of its Advantage2 system, which the company said achieved a 75% reduction in "noise" compared to prior models. Lower noise equals more accuracy for quantum computers. The system also integrated a hybrid solver, which supports 2 million variables and constraints that will help businesses "run large-scale, business-critical applications in production."
Given the excitement over quantum computing, D-Wave has seen its stock price explode over 1,600% in the past year. The stock was trading around $16 at Wednesday's market close, so it is not currently at any risk of breaching NYSE compliance. Nor is it trading at a price so high it seems out of reach for most investors. Additionally, most of the company's shares are publicly traded, so there is plenty of liquidity. The conditions that generally prompt a stock split don't exist right now.
It's important to remember that D-Wave's stock has been incredibly volatile. In fact, in 2024 the stock did at times trade for less than $1 and received a notice of non-compliance from the NYSE, at which time the company said it would consider a reverse stock split.
Now, D-Wave has a roughly $5.3 billion market cap, yet still generates very little revenue and substantial losses. If appetite for artificial intelligence and quantum computing stocks were to really dry up, or investors began to believe that quantum computing may not have as much potential as initially thought, that could trigger a big sell-off. But that doesn't seem likely right now, which is why I don't see any type of stock split in D-Wave Quantum's foreseeable future.
