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Stock Splits: Making Stocks More Affordable

India Center for Engineering (ICE) | Image credit: Lam Research LinkedIn
India Center for Engineering (ICE) | Image credit: Lam Research LinkedIn

Expensive share prices are a thorny issue for investors, particularly new investors with limited capital.

A high absolute share price is not a symptom of an overvalued stock. Rather, it simply represents a smaller issued share capital base available for investors to purchase.

Let’s consider food and beverage giants PepsiCo (NASDAQ: PEP) and Coca-Cola (NYSE: KO).

Both companies operate with similar business models and have roughly the same market capitalisation.

However, Pepsi’s shares cost nearly three times more than Coca-Cola’s.

This discrepancy is because Pepsi has a lower outstanding issued share count at 1.4 billion compared to Coca-Cola’s 4.3 billion.

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The example above illustrates why absolute share prices may be higher even when two companies have roughly the same market capitalisation.

When the share price of a company goes too high, companies may decide to split the stock to bring prices down to a more palatable level.

For example, Nvidia’s (NASDAQ: NVDA) shares were trading at US$188 two years ago.

Now, the chip giant is trading at over US$1,100 per share. This price can be rather inaccessible to many new investors with a lower starting capital base.

What’s worse is that Nvidia is a company with strong growth potential.

The company has just announced another set of stellar earnings, with significant improvement in both its top and bottom line performance.

Fortunately, the company just announced a 10-for-one stock split, effective 7 June this year.

This situation above is similar to another technology giant that you may be familiar with, Alphabet (NASDAQ: GOOGL).

Alphabet owns the popular Google search engine and also the video-sharing site YouTube.

In 2022, Alphabet executed a 20-for-one stock split, reducing its share price from US$2,255 to around US$113.

This was also the second time Alphabet initiated a stock split, the first being in 2014 when the company announced a two-for-one stock split.

If you owned one share of Alphabet back in 2014, you would now own 40 shares after two rounds of stock splits.

To buy 40 Alphabet stocks in the market, you would need around US$7,000 now.

Two years ago, to buy the same 40 shares, you would need to fork over US$90,000.

That’s nearly 13 times more if Alphabet had not split its shares.

Investors who are looking for promising growth stocks that look set to become more affordable should keep their eye on these three stocks that announced upcoming stock splits.

Nvidia

As mentioned earlier, Nvidia declared a 10-for-one forward stock split, set to take effect on 7 June this year, which will adjust the stock price to approximately US$100 per share.

This decision is in line with another blockbuster performance in the first quarter of fiscal year 2025 (1Q FY2025).

Revenue surged more than threefold year on year, reaching US$26 billion.

Moreover, net profit saw an even more dramatic rise, growing over 700% year on year to US$14.9 billion.

Currently, Nvidia boasts the highest operating margin among the “Magnificent 7” group of stocks for the latest quarter, as displayed in the graph below.

Source: Author’s Calculation

More information about Nvidia’s earnings can be found in this article here.

Chipotle Mexican Grill (NYSE: CMG)

Chipotle is one of America’s favourite Mexican food chains.

The company has about 3,500 restaurants in operation across the US, Canada, and several countries in Europe such as France, Germany, and the UK.

It is also planning to expand in the Middle East, with new restaurant chains scheduled to open in Dubai and Kuwait this year.

Currently, Chipotle’s shares are trading above US$3,000, a steep price for many investors.

However, the beloved Mexican restaurant has announced a 50-for-one split on 19 March this year, which will take effect on June 18.

This will result in shares of Chipotle trading at roughly US$60 to US$70 each, making them much more accessible.

This is a welcome move for investors as Chipotle consistently dishes out strong financial performance.

Its stock has grown over 333% over the past five years, outpacing other listed restaurant chains such as McDonald’s (NYSE: MCD) and Domino’s Pizza (NYSE: DPZ).

Looking at its first quarter report for fiscal year 2024 (1Q 2024), total revenue was US$2.7 billion, a 14% year-on-year increase. Net income also rose from US$291.6 million to US$359.3 million over the same period.

The company also generated a free cash flow of US$436.5 million during the quarter.

Chipotle is planning to open between 285 to 315 new restaurants for the rest of this year.

Lam Research (NASDAQ: LRCX)

Another semiconductor giant, Lam Research, has recently declared a 10-for-one stock split.

This news was announced on 21 May 2024 and is scheduled to take effect on 2 October 2024.

Lam Research’s share price is currently trading above US$900. The split will result in the share price adjusting to around US$100.

Lam Research plays a significant role in the midstream semiconductor industry, specialising in the development and manufacturing of wafer fabrication equipment.

The company boasts a roster of reputable clients, including  Intel (NASDAQ: INTC), Taiwan Semiconductor Manufacturing Company (NYSE: TSM), and Samsung (KRX: 005930), underscoring its importance in the global semiconductor supply chain.

For 1Q 2024, the company reported US$3.79 billion in revenue, representing a year on year decrease of 1.96%.

Despite the slight decline in revenue, net profit rose by 18.7% year on year. This profit growth was the result of improved gross margins, which increased from 41.5% to 47.5% year on year.

Additionally, Lam Research generated a free cash flow of US$1.3 billion for the quarter.

The company is expected to post healthy growth in line with the growth of artificial intelligence (AI) and semiconductors.

We have just revealed the top 7 US tech stocks poised for remarkable growth. In today’s fast-paced market, betting on these giants could mean more money in your pocket. With a focus on solid fundamentals and innovative prowess, these selections should earn a place in your portfolio. Click here to grab your FREE report now and start investing in the future, today.

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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article. 

The post Stock Splits: Making Stocks More Affordable appeared first on The Smart Investor.