Stock splits are tools used by companies to artificially manipulate their share price and outstanding share count, without changing the company's market cap. Companies don't do these randomly -- there is often a method to the madness. They usually occur after a big run in a stock, whether up or down. Few stocks have seen bigger moves than pure-play quantum computing stocks like IonQ (IONQ -4.77%). Could this be the next one to conduct a stock split?
How stock splits work
There are stock splits, and then there are reverse stock splits. As I mentioned above, both change a publicly traded company's share price and share count. But I want to reiterate that they don't change the market cap, and therefore don't change an investor's equity position if they own the stock. Whatever the equity position is prior to a split, it will be the same after a split.
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Traditional stock splits lower a company's stock price and increase the outstanding share count. For instance, let's say an investor owned 200 shares of a stock trading at $300 per share for a total equity position of $60,000.
If the company were to conduct a four-for-one stock split, the investor would exchange one share for four, bringing the number of shares they own to 800. The share price would decline to $75 ($60,000/800), because the equity position does not change. The most common reason for a stock split is to make shares feel more attainable to retail investors, especially if the stock went on a nice run. Stock splits can also boost liquidity.
Reverse stock splits do the opposite by raising the share price and lowering the share count. While companies can do these to raise their stock prices if their peers trade higher, a more common example is if a company has seen its stock fall dramatically and is at risk of breaching compliance rules with a major stock exchange like the New York Stock Exchange or Nasdaq.
Both exchanges will send deficiency notices to companies threatening potential delisting if a stock trades below $1 per share for 30 consecutive trading days. A reverse stock split can get a company's stock price above $1 and buy it time to turn things around while staying on a major exchange. Investors typically view reverse splits as a bearish indicator, because they suggest that management doesn't think they can get the stock price up through operational execution.
Is IonQ next?
Investors are extremely excited at the prospect of quantum computers, because they are the next iteration of the computer and could create the next iteration of the internet.
If quantum computers can be commercialized, it represents a massive opportunity for the first movers. Unlike computers, which are built on the foundation of bits, the smallest unit of digital data, quantum computers use qubits. These are essentially bits in a state of superposition, meaning they can process massive amounts of data and potential solutions simultaneously. This gives them the potential computing power to solve problems well beyond computers and even the most advanced supercomputers available today.
IonQ's highest-performing quantum computer is IonQ Forte, which has 36 qubits. The more qubits a quantum computer has, the more powerful it can be. While IonQ is not a leader in terms of most qubits, its two-qubit gate fidelity, which is a measure of accuracy, clocked in at an industry-leading 99.97%, which the company believes is just as important as qubit amount.
The stock is up close to 500% over the past years and has reached a $23.4 billion market cap. It's trading on the New York Stock Exchange at over $65 per share, so IonQ is not currently at risk of breaching compliance rules. Furthermore, most of its float is traded publicly, so I do not see any liquidity issues. For all these reasons, I don't see any need for any kind of stock split right now.
