- Google executed a 20-for-1 stock split on Monday as the company aims to make shares more appealing to retail investors
- Later this week, the GME stock split will see GameStop issue three extra shares for every share an investor owns
- These stock splits continue the trend that the Apple stock split kickstarted in 2020 after becoming the first company to reach a $2 trillion market cap
Stock splits have repeatedly commanded headlines in the past two years. In 2020, the Apple stock split saw investors enjoy a 4-for-1 split, while Google executed a 20-for-1 split just this last Monday. Other major tech companies that have split recently following sky-high share appreciation include Amazon, Nvidia and Tesla.
This week, the GME stock split will continue the trend when GameStop executes a 4-for-1 split on 21 July. But unlike the other names on this list, the beleaguered video game retailer isn’t splitting at the top of its game. So, for many following the company, the question remains: why?
What is a stock split?
Stock splits occur when companies divide their existing shares by a specified ratio to create new shares. In turn, the split lowers the price of individual shares while maintaining a company’s market cap (and the value of investors’ holdings).
For a quick example, say that Stock A is worth $1,000. If the company decided to execute a 10-for-1 stock split, each share would split into ten shares worth $100 apiece.
In theory, stock splits increase share count while leaving the company’s value intact. In reality, stock splits can temporarily increase price volatility following the announcement and in the days surrounding the actual split.
Why do companies split their stock?
One of the primary goals behind a stock split is to lower the price of a stock to make them more affordable. When shares rise into the upper hundreds or thousands of dollars, retail investors may be priced out.
We saw this happen with several major tech stocks during the pandemic. As tech demand soared, so did share prices, leaving many everyday investors unable to buy shares of companies like Apple, Alphabet and Nvidia.
By splitting shares when prices rise, these companies make individual shares more affordable for retail investors. At the same time, this increases liquidity, as shares trade more freely when more investors can access them.
Take Google’s stock split. Last Friday, shares closed over $2,200 apiece – well out of the price range of many average investors. But on Monday, following the firm’s 20-for-1 split, shares opened around $112 apiece.
Companies may split stock for other reasons, too. For instance, if the firm sees more growth in its future, splitting shares allows that growth to show up in stock prices. The process also gives employees more flexibility in their employee stock-based compensation packages.
Lastly, some companies may consider stock splits if they hope to end up in a stock index like the Dow, which may set admission requirements that include share prices.
In the news: the Alphabet stock split
Alphabet, Google’s parent company, announced its 20-for-1 split during its fourth-quarter revenue report for 2021 in February. Shares initially rose more than 8% on the news, with prices approaching $3,000 at the time. The actual split occurred just this week on 18 July.
This week’s stock split marks only the second for Google since its 2004 IPO. (In 2014, Google executed a 2-for-1 stock split that also saw the creation of its Class C shares.) The split applied to all of Google’s shares, including its privately-held Class B stock.
The primary reason for Google’s split was the sheer heft of its share prices. Like many other mega-cap tech stocks, Google watched its stock become increasingly unaffordable during the pandemic. Now, it’s become one of the last mega-caps to split in the current wave and bring affordability back within reach.
Looking back at the Apple stock split
Google’s 20-for-1 stock split is impressive both because of its starting price and the shockingly high split ratio. But it’s far from the only stock that’s split since the onset of the pandemic.
The Apple stock split in 2020 was arguably the first to kick off the current wave of divisions. In August of that year, the iPhone maker divided shares for the fifth time in its history. The 4-for-1 split brought prices down from over $500 to around $125 a share.
(Amusingly, Tesla executed a 5-for-1 stock split on the same day. Graphics chip maker Nvidia would go on to split 40-for-1 in July 2021.)
Since its stock split, Apple shares have increased marginally to around $147 apiece. While many stocks see greater gains following stock splits, this marginal appreciation isn’t unusual given the broader tech selloff of 2022.
Looking forward to the GME stock split
Apple and Google are far from the only stocks that have split since the pandemic began. Kellogg, Nvidia, Tesla and Amazon also make the list of big names that have divided their shares. And this week, GameStop plans to capitalize on the last two years of market turbulence with their own GME stock split.
GameStop’s recent performance
Unsurprisingly, GameStop’s share price has tumbled with the broader market in 2022. This year’s losses piled on top of the stock’s shocking 31% drop in 2021 after its ascension to meme stock status.
But GME made a comeback in early July, gaining 15% in just days. A large portion of the gains can be accredited to investor enthusiasm about its upcoming stock split – the company’s first in 15 years.
The 4-for-1 division, first announced on 31 March and confirmed on 6 July, will occur after trading closes on 21 July. Investors who owned shares by market close on 18 July will receive three new shares for every share owned on that day.
Why is GME splitting?
For many investors, the GME stock split is a bit of a puzzle. At just under $147 per share at the time of writing, its price is a far cry from Apple’s price during its 2020 stock split. And it positively pales compared to Google’s $2,200 pre-split value.
It’s possible that GameStop is trying to return its share price closer to its “true” valuation, as the company’s P/E ratio has recently run into the negatives. But some analysts have criticized the move as a ploy to drum up investor interest and capitalize on current trends.
So far, the numbers seem to fit. For instance, in fiscal 2021, GameStop lost more than $400 million despite its historic meme stock status. And the company announced a new round of layoffs just days after revealing its stock split.
What do the Alphabet, Apple and GME stock splits mean for you?
Apple’s 4-for-1 stock split pales in comparison to Google’s massive 20-for-1 split. But even the Apple stock split looks hefty compared to GME’s stock split from $147 per share to around $37 per share.
Still, the stock splits won’t greatly impact either Google or GameStop’s market value – in theory, anyway. After all, the goal is a stock split is to increase the number of shares without affecting market cap.
But in practice, stock splits often lead to increased price volatility. While investors and day traders may view this as a chance to increase their gains, it’s also a time ripe for losses. (Especially for investors who don’t practice buy-and-hold investment.)
On a longer-term horizon, tech investors may also look forward to higher gains. Studies show that stocks that split see an average price appreciation of 25% in the year following the split, compared to a 9% gain in non-split stocks.
Unfortunately, when it comes to GameStop, it’s difficult to say how a stock split could impact investors’ prospects. While many stocks do see increased volatility and gains following a split, those stocks generally don’t split at comparatively low prices – or have a history of trading above their valuation based on meme status.
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Stock splits are designed to broaden the appeal of high-growth, high-priced companies to retail investors.
But it’s important not to fall for buzz alone – just because a company is expensive (or famous) enough to split doesn’t mean it’s a good long-term investment. You should always evaluate the underlying business you’re buying to ensure you’re on track to meet your long-term goals.
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