At first glance, it might surprise investors to see Microsoft (MSFT +0.06%) as a stock-split candidate. Stocks such as Broadcom allowed nominal share prices to rise above $1,000 per share before initiating a split. Microsoft trades at just $518 per share at the time of this writing, far below such levels.
Still, investors should remember that Microsoft stock has increased by more than 1,300% since Satya Nadella became CEO in February 2014, and growth is expected to continue. Additionally, one aspect of Microsoft stock will probably lead to a stock split before its nominal price reaches four figures, so investors should prepare for such an event.
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The pressure for a Microsoft stock split
Microsoft is on track for a stock split because it is one of the 30 stocks that determine the Dow Jones Industrial Average.
As most investors know, the Dow is one of the three major indexes investors look at to gauge the performance of the overall market. The S&P 500 and the Nasdaq Composite index comprise a larger number of stocks, and their calculations are weighted by market cap, arguably providing a more comprehensive view of the overall market.
In comparison, the Dow is a price-weighted index. This means that instead of a company's size, the nominal price of the stock determines its weight in the index. This means a stock like the A shares of Berkshire Hathaway, which currently trade at around $715,000 per share, would probably not be considered by the index's managers despite its massive successes over the last 60 years under Warren Buffett.
Despite this challenge, the Dow has remained popular, and the 30 stocks in the index appear to place great importance on their inclusion. Moreover, at the aforementioned $518 per share, investors should remember that Microsoft carries disproportionate influence in the Dow. Of the 30 stocks, only Goldman Sachs and Caterpillar, which trade at higher nominal prices, hold more sway.
Microsoft's attributes
Additionally, investors should also understand why Microsoft trades at $518 per share and the likelihood of its continued growth.
NASDAQ: MSFT
Key Data Points
Microsoft has not split its stock since February 2003. Investors should remember that the stock lost value between 2000 and 2014 when Steve Ballmer was CEO. At the time, investors turned on Microsoft as competition from Apple's Mac computers and the invention of the iPhone made the Windows OS a less dominant product. Thus, Microsoft did not face any pressure for a split since the stock was not moving higher.
In contrast, when Nadella took the helm in 2014, he made Microsoft a more cloud-centric company and has more recently placed greater emphasis on artificial intelligence (AI). Consequently, Microsoft's Azure is the second-biggest cloud platform next to Amazon's AWS. Also, Microsoft's research and development and relationship with OpenAI have made it one of the more critical AI companies.
Image source: Statista.
According to Grand View Research, the cloud and AI industries are expected to have estimated compound annual growth rates exceeding 20%. That will likely take Microsoft's stock price even higher during that time, making a stock split even more necessary.
Expect a Microsoft stock split
Given the state of Microsoft stock, investors should anticipate a stock split sooner rather than later.
Admittedly, Microsoft's stock price is significantly lower than that of many other tech companies that have initiated stock splits. However, the company likely wants to stay in the Dow 30, and since that is a price-weighted index, it will likely have to split its shares in the near future to avoid being removed.
Moreover, investors should remember it was Microsoft's successes during Nadella's tenure that have taken the stock price higher and necessitated a stock split. Since Microsoft plays a crucial role in two industries expected to grow significantly over the next few years, the high likelihood of continued stock price increases will only add to that pressure.
