It seems everyone loves a stock split. Sure, they don’t change a company’s fundamentals. Similar to the way you cut up a pizza doesn’t change the overall size of the pizza, a stock split doesn’t change a company’s overall value. But it can make getting a slice easier for more hungry investors.
One of the hottest stocks of 2024, Super Micro Computer (SMCI -1.04%), has cooled off recently as shares have become quite expensive. Could a stock split help this formerly red-hot name spark renewed interest? Let’s explore the situation and see if an answer presents itself.
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What does Super Micro Computer do?
Let’s start with the basics: Super Micro Computer, or Supermicro (as it is also known), is in the business of making high-performance computing equipment. Specifically, the company makes server racks, cooling systems, and other physical hardware necessary for the creation and management of advanced computing systems.
Basically, this company makes the things you buy when you want to build or expand a data center or supercomputer. Its server racks are ideal for holding graphics processing units (GPUs), the brains behind today’s advanced artificial intelligence (AI). And since the top supercomputers and data centers use hundreds of thousands — even millions — of these GPUs, business is booming for Supermicro.
Analysts expect the company’s revenue to skyrocket in the coming years, with the consensus predicting 2024 revenue will rise 106% to $14.7 billion and 2025 revenue will increase a further 41% to $20.7 billion.
Is now the time for a stock split?
As of this writing, Supermicro shares trade for around $965. Less than a year ago, they were trading for about $94. In under a year, Supermicro stock has grown 10x. That, my friends, is a 10-bagger.
This rapid growth and the now very high stock price (compared to the average stock out there) have some suggesting that now is the time for Supermicro’s board of directors to initiate a stock split.
But that response isn’t so simple.
First, some reasons why a split helps. Retail investors often lose interest when a stock reaches a certain price threshold, say above $400. It becomes a psychological barrier, regardless of whether the barrier is truly justified. Many retail investors can’t afford to buy whole shares if the price rises too high and that seems to matter (despite the viable alternative of buying partial shares). For others, portfolio diversification becomes difficult. Whatever their reasons, some retail investors shy away from high-priced stocks, and boards of directors know this. That’s why they often perform stock splits when their companies’ stock prices become elevated.
There are also valid reasons to delay or not perform a split. Perhaps the board thinks the stock price will eventually decrease, meaning a reverse stock split might follow a stock split. Reverse splits can have a psychological effect on investors too and cause a selling spree. Also, lowering the stock price makes it more susceptible to day traders, and the volatility they can bring with them. Moreover, stock splits cost the company money to execute. Granted, it’s not a ton of money, but companies might incur six-figure fees from exchanges, plus legal and regulatory hurdles and costs.
Is a stock split coming?
There are pros and cons for a potential stock split for Supermicro. On the one hand, shares now trade for over $1,000, which undoubtedly depletes some level of retail investor interest. Nevertheless, the company’s leadership may not be ready to initiate a stock split yet, given how quickly the company’s shares have risen in value.
In the final analysis, I believe Supermicro will split its shares, although it may take months — or perhaps longer — before it happens.
Nevertheless, stock split or not, Supermicro remains a stock that growth investors should keep a close eye on, given its explosive potential. It’s not a stock for every portfolio, but considering how quickly the overall AI market is growing, Supermicro’s future looks very bright.
Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
