This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Despite a mountain of economic data and earnings news over the past month, the biggest news for two popular FAANG stocks over the past five weeks was the announcement that they'd be enacting stock splits.
First up was Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the parent company of internet search engine Google and streaming platform YouTube. Alphabet announced a 20-for-1 forward stock split that, as of the closing bell on March 9, would bring its share price down to around $133 (for the Class A shares, GOOGL). Shareholders still need to vote to approve the split, which is expected to take effect in mid-July.
This past week, e-commerce giant Amazon (NASDAQ: AMZN) followed suit with a 20-for-1 forward stock split announcement of its own. Assuming it receives shareholder approval, Amazon's lofty share price will come down to around $139, based on its March 9 close. This will be Amazon's first stock split since September 1999.
What you need to know about stock splits
Stock splits have absolutely no effect on the operating performance of an underlying business. In other words, a company isn't going to sell more or less of its product or service just because a split is going to take place. Rather, a stock split is merely a way for publicly traded companies to alter their share price and outstanding share count without affecting their market value.
As an example, Amazon shares are set to fall from around $2,785 to one-twentieth of their current per-share value -- around $139.25. However, every existing shareholder will receive 19 additional shares for each share they own. Instead of owning 1 share at $2,785, investors would have 20 shares at $139.25. Both work out to the same market value of $2,785, but the stock split mechanism allows for the share price and outstanding share count to be altered.
Why enact stock splits? The simple reason is to make shares more affordable for retail investors. If you have $500 to invest and your online brokerage doesn't allow for fractional-share investing, you can't directly put your money to work in Alphabet or Amazon right now. But after their respective splits take effect, $500 would be enough to purchase a few shares of either company.
Stock splits are also often indicative of a company that's performing well. Think of it this way: A publicly traded company's share price probably wouldn't be high enough to merit a split if it wasn't executing well and out-innovating its competition.
With Alphabet and Amazon taking off following their respective stock split announcements, the three high-flying stocks below may be next to split their shares.
Tesla
For those of you who might not recall, electric vehicle manufacturer Tesla (NASDAQ: TSLA) was one of the first brand-name stocks to see its valuation launch higher after announcing a stock split. Tesla's 5-for-1 forward split announced in August 2020 saw the company's shares trade higher by more than 60% in the 20 days between the announcement and enactment of the split.
One reason a stock split would make sense here is Tesla's share price. Although some folks have the luxury of purchasing fractional shares, other investors would be forced to save up $859 (as of March 9 close) just to buy a single share of Tesla. The company's previously announced 5-for-1 split occurred with shares at $1,374; that's well within sight given the range Tesla has been trading in this year, of about $800 to $1,200 a share.
Another reason for Tesla to consider a stock split is that Elon Musk knows his audience. Even though institutional investors and insiders combine to hold more than 61% of outstanding shares, Musk is well aware that Tesla is a favorite holding of retail investors. To keep them happy and buying Tesla stock, Musk may be willing to encourage the company's board to approve another stock split. Doing so would allow investors with less starting capital to take a position in Tesla.
AutoZone
In February, after Alphabet announced its stock split, I believed Amazon would be the most logical company to next take the plunge. With Amazon following suit, the honor now gets bestowed on automotive replacement parts company AutoZone (NYSE: AZO). Investors have to go back almost 28 years to find the last time (April 1994) AutoZone enacted a stock split. A single share recently set investors back about $1,885, as of March 9.
You might be wondering why AutoZone hasn't made its shares more affordable to retail investors who don't have access to fractional-share purchases. The answer seems to be tied to the company's mammoth share repurchases over the past 24 years.
As I described last month, the company has been given a green light from its board of directors to make significant share buybacks since 1998. Including the recently reported fourth quarter, AutoZone has spent more than $28 billion repurchasing its stock over 24 years. Over that stretch, the company's outstanding share count has shrunk from 150 million to slightly below 20 million. I believe that AutoZone's board likes to highlight its progress in reducing the company's share count; a stock split, however, would nominally increase the share count. It's possible that AutoZone's board believes enacting a stock split would somehow obscure that buyback progress.
Then again, with fewer than 20 million shares outstanding, AutoZone's ability to repurchase its own stock is shrinking. If the company wants to continue returning capital to shareholders via buybacks, a stock split may be necessary.
Broadcom
The third high-flying stock that could follow in Alphabet's and Amazon's footsteps and split is semiconductor solutions giant Broadcom (NASDAQ: AVGO). Although Avago Technologies -- which acquired Broadcom Corp. in early 2016 and then named the combined entity Broadcom -- never split its shares, the original Broadcom did so on three occasions (1999, 2000, and 2006).
There are a few good reasons for Broadcom to consider splitting its stock right now. First, as with the other companies on the list, Broadcom's share price is becoming prohibitively high for retail investors who don't have access to fractional-share purchases. Shares were near $600 last week and haven't dipped below $533 in over four months.
Additionally, Broadcom hasn't been leaning on share buybacks. In fact, Broadcom's board only recently authorized a $10 billion share repurchase agreement. This is a company that's focused on boosting its dividend, innovating, and acquiring other companies, rather than buying back shares. In other words, it shouldn't have the same reluctance to split that I described above with AutoZone.
A split would also make sense given that Broadcom's business is firing on all cylinders. Its backlog hit $14.9 billion in 2021, with CEO Hock Tan noting in December that the company's supply was already booked through 2022 and into 2023. Considering that chip shortages are persisting, Broadcom's share price has a very good chance of heading even higher.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
