Companies tend to use stock splits for a few different reasons. Traditional stock splits artificially lower a company's share price while increasing the amount of shares outstanding, without changing the market cap or equity value of a stock. Reverse stock splits do the opposite. While difficult to predict, companies will typically pull the trigger on a stock split after a stock has made a big move in one direction or the other.
One stock that has been volatile and made quite a few big moves is D-Wave Quantum (QBTS +3.69%), one of the few pure-play quantum computing companies. D-Wave is not only trying to build advanced quantum computers, but also trying to commercialize them. Could D-Wave Quantum soon execute a stock split?
Reasons to do stock splits
Let's quickly do an example of a stock split to illustrate how it works. Let's say a person buys 60 shares of a stock trading at $800 per share for a total equity position of $48,000. If the company then conducts a 6-for-1 stock split, the person would exchange one share for six new shares of the company, bringing their total share count to 360 shares. Remember, the market cap doesn't change, so the share price would decline to $133.33 ($48,000/360 shares).
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If stock splits do not change the market cap or value of a company, then why do companies do them? There are a few reasons, but the most common one for a traditional stock split is to make shares more attainable for retail traders. This is most common when the stock just went on a big run and now trades for hundreds or even thousands of dollars per share. The company's peer group may also trade at much lower stock prices, which is another reason to bring down the price, while increasing the share count can also boost liquidity.
Reverse stock splits do the opposite by artificially raising a share price and lowering the share count. The big reason companies use these is if they are dealing with compliance issues, whether on the New York Stock Exchange or Nasdaq. Both exchanges will send a deficiency notice to companies that have traded for less than $1 per share for 30 consecutive trading days.
If companies think they can turn things around and want to stay on one of these two very liquid exchanges, they can execute a reverse stock split to get back into compliance and buy them some time. However, the market typically does not view reverse splits favorably because they may indicate management doesn't think it can raise the stock price through operational execution.
Will D-Wave Quantum soon conduct a split?
Quantum computers are expected to be the next iteration of the computer. While standard computers are built on the foundation of bits, the smallest unit of digital information, quantum computers leverage qubits, which are in a state of superposition. Qubits can process data in a way that simultaneously considers multiple solutions, giving them extraordinary computing capabilities.
If researchers are correct, quantum computers will one day be more advanced than even the best available super computers today. Their problem-solving capabilities will also be extraordinary, with the ability to redefine how we look at problems related to medicine, chemistry, finance, and much more.
NYSE: QBTS
Key Data Points
D-Wave is the only company working on building quantum computers with the more traditional gate-based model and also through a process known as quantum annealing. The gate-based system can be used to solve a broader set of problems because the qubits in theory can be controlled better. However, in the gate-based model, the qubits are also more error-prone and therefore more difficult to keep in a steady state.
Meanwhile, in quantum annealing, it is easier to scale the qubits, but they aren't as powerful as those in the gate-based system and therefore the system works best for optimization problems.
The hype around quantum has sent D-Wave's stock flying; it's up over 3,000% in the past year. Given that the stock now trades over $33 per share, it is not at risk of breaching NYSE compliance rules. In 2024, the company did trade for less than $1 at times, and management even considered conducting a reverse split, although never ended up going through with it, probably because of the huge run the stock went on.
I suspect that D-Wave's stock will continue to be volatile for the foreseeable future, but I see no reason for any kind of stock split at this time.
