Stock splits have become more common with tech stocks in recent years, even though such actions change little on the surface. After all, 100 shares at $100 per share is worth the same as 200 shares at $50 per share.
However, if Berkshire Hathaway is any indication, high nominal share prices tend to reduce liquidity. And while small investors can buy fractional shares, most shareholders may prefer the simplicity of owning whole shares.
Additionally, many stocks grew after stock splits, so much so that they may need another split. To that end, investors may want to look at Microsoft (MSFT 0.59%), Adobe (ADBE -1.20%), and Booking Holdings (BKNG 0.13%) as possible candidates for an additional split.
Microsoft hasn't split its shares in a generation, but now might be the right time
Jake Lerch (Microsoft): In my opinion, Microsoft (MSFT 0.59%) shares are overdue for a stock split. With a stock price now over $325, there's no doubt that buying even a single Microsoft share can be a heavy lift for some investors.
What's more, it's been over two decades since the company last split its stock. That 2-for-1 split came in February 2003, only three years into the Steve Ballmer era. Since then, Microsoft's shares have soared more than 2,000%.
When it comes to fundamentals, Microsoft looks as strong today as ever before. In its most recent quarter (the three months ending on Sept. 30, 2023), the company delivered another set of fantastic results, highlighted by:
- $56.5 billion in revenue, up 13% year over year
- $2.99 in earnings per share (EPS), up 27% from a year earlier
- Accelerating revenue growth in the company's Azure cloud services segment -- its fastest-growing business
Following its wonderful quarter, Microsoft's market cap now stands at an astounding $2.53 trillion. That puts it close to catching Apple, whose $2.68 trillion market cap makes it America's largest public company.
Indeed, with Microsoft poised to once again top the list, now might be the right time for Microsoft's leadership to announce a 2-for-1 or even 3-for-1 stock split. Such a move would bring the company's share price more in line with other stocks in the $1 trillion market cap club, such as Apple, Amazon, and Alphabet.
In fact, those three mega-cap stocks have all completed stock splits in the last few years: Apple did so in 2020, and Amazon and Alphabet both split their shares in 2022.
At any rate, Microsoft remains a terrific stock to own. Its combination of innovative products, diverse business segments, and first-class leadership make it a stock any investor should consider buying -- regardless of whether it splits its stock or not.
Adobe is no stranger to stock splits. It's coming time for another
Justin Pope (Adobe Inc.): Creative software company Adobe has split its stock six times since its founding in the early 1980s. While a stock split doesn't fundamentally change the stock's value, it can make the share price digestible for individual investors who don't have thousands of dollars to buy shares at a high price.
You might guess that Adobe's been a good investment if the company had to split six times. You'd be right. The stock has appreciated more than 267,000% over its lifetime! Today, shares have again gotten pricey to accumulate, trading at more than $500 per share.
Adobe's strong growth could mean that shares will continue floating out of range for individual investors. The company is firing on all cylinders. It recently reported third-quarter earnings, posting record revenue, and its EPS grew more than 20% year over year. A mix of revenue growth and share repurchases has continued to boost the bottom line. Analysts believe EPS will increase by 13% annually over the next three to five years.
The stock's valuation will affect the share price, but realistically, shares could eventually drift to $600 and beyond if the business keeps performing at a high level. Adobe's previous splits have been 2-to-1, meaning doubling the share count but halving the price per share. Investors would see Adobe trade at just over $250 if it split 2-to-1 again. A more aggressive split, say 5-to-1, would price shares just over $100.
It seems another stock split is just a matter of time for this proven tech winner.
The stock that needs to reverse a reverse split
Will Healy (Booking Holdings): The stock split history of Booking Holdings differs from most stocks that have split in the past. The former Priceline.com was a high-flyer during the dot-com boom and went on to lose nearly all its value. Company management was uncomfortable with this situation and instituted a 1-for-6 reverse split in 2003.
This strategy worked, perhaps too well. By 2013, the price had surpassed the $1,000 per share level. Although it has traded in a range over the previous five years, today's price of over $2,800 per share makes it the 4th most expensive stock trading on U.S. exchanges today.
Moreover, that price is so high that it should arguably go beyond reversing its 1-for-6 reverse split. At current levels, a 6-for-1 split would still leave it with a share price of around $470 per share, ranking it in the top 50 in terms of nominal share price.
Additionally, Booking stock has risen 40% this year, and Allied Market Research forecasts a 15% compound annual growth rate (CAGR) through 2030 for the online travel industry. This prediction indicates that its stock price will march higher by virtue of industry growth.
Booking's financials may confirm that forecast. In the first half of 2023, revenue of $9.2 billion rose 32% compared with the same period in 2022. Amid that increase, net income rose to almost $1.6 billion in the first two quarters of 2023, versus just $157 million in the same year-ago period.
For 2024, analysts forecast an 11% rise in revenue. Hence, even with slowing revenue increases, online travel continues to become more popular.
Furthermore, despite those increases, the price-to-earnings (P/E) ratio stands at just 24, which is probably low considering the company's growth. Hence, if the company wants more investors to bid up Booking's stock price, a stock split is a strategy it should probably consider.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jake Lerch has positions in Adobe, Alphabet, and Amazon. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Adobe, Alphabet, Amazon, Apple, Berkshire Hathaway, Booking Holdings, and Microsoft. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
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October 29, 2023 at 06:00PM
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3 Stock-Split Stocks Due for Another Split - The Motley Fool
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