There are two types of stock splits -- and in my view, two types of companies that perform stock splits. First is the reverse stock split, in which a company consolidates shares of stock to raise the price. In a 1-for-10 stock split, someone who has 10 shares of a stock suddenly has one share, and the value is now 10 times what the share price was pre-split. That way, the investment's total value doesn't change.
Those are the kind of splits that troubled companies perform. They're usually just a cosmetic effort to keep the share price above $1 to confirm with listing requirements of the New York Stock Exchange or the Nasdaq, and either way are a huge red flag.
Then there's the forward stock split, in which a company multiplies the shares an investor holds but reduces the price accordingly. So in a 3-for-1 stock split, a share valued at $600 would drop to $200, but you have three shares for every one that you had before the stock split.
These types of splits are viewed positively because it makes the shares more affordable to retail investors, and can create a spike of trading as new investors who felt locked out of the stock can suddenly invest. A great example is Chipotle Mexican Grill, which completed a 50-for-1 stock split in 2024. Shares of Chipotle stock were trading at more than $3,200 before the split, and management said it hoped to make shares more accessible to employees and new investors.
Image source: Getty Images.
Stock splits can be a great tool
For high-flying stocks, a stock split can be very helpful. It increases the investor base by making the stock more accessible to smaller investors. It also makes the stock more accessible to options traders, as options have a 100 contract multiplier -- a single options contract controls 100 shares of stock. So, it's easier for more people to trade options when a company's stock is $50 rather than $500.
Finally, a stock price that's too high can affect whether a company can appear in the prestigious Dow Jones Industrial Average. Companies want to be in the Dow because there are exchange-traded funds that track the index's movements, which instantaneously means more shares are sold. However, the Dow only has 30 companies and is highly selective. And it's also price-weighted, which means a company whose stock has a higher price can have a disproportionate influence over the movements of the index.
For example, Nvidia completed a 10-to-1 stock split in June 2024 and then was added to the Dow later that year.
Is a Palantir stock split in the cards?
That brings us to Palantir Technologies (PLTR +1.34%). The data mining company has a one-of-a-kind artificial intelligence platform that helps both commercial businesses and government agencies perform analyses and make decisions in real time. The company's stock began its mammoth rise in 2023 and is up more than 2,000% in the last three years. Palantir's 340% gain in 2024 made it the S&P 500's top gainer, and its 118% year-to-date return ranks it No. 2 behind just Seagate Technology.
NASDAQ: PLTR
Key Data Points
Palantir scored its first quarter of $1 billion revenue this year, as second-quarter sales jumped 68% from a year ago. The company also closed $2.27 billion in total contract value sales, up 140% from last year, and its customer count grew 43% for the quarter. So, the company's growth ramp is just beginning.
Does that mean that Palantir will be the next company to split its stock? That's hardly likely. The company's stock price is just $165 per share at this writing, which still makes it accessible to retail investors and options traders. I've already talked about how Nvidia and Chipotle were more than $1,000 per share when the boards of those companies approved a split. Alphabet shares were $2,255 in 2022 before the company executed a 20-for-1 split; Tesla shares were $2,000 when it did a 5-for-1 split in 2020 and around $900 in 2022 before its 3-for-1 split; O'Reilly Automotive, which performed a 15-for-1 stock split in June, was trading at $1,348.
Palantir has a long way to go before its board should even consider a stock split. But if it ever crosses the $500 mark, then it would likely be something to consider.
