June 27, 2024

Stock Splits Do Not Impact Company Value

Authored by Rahul Setty

In light of several recently announced stock splits from Nvidia to Chipotle to Broadcom, I would like to take a Brief moment to discuss the nary impact of a stock split on a company’s intrinsic value per share. 

Company Value, or Market Cap = Share Price x Number of Shares

In other words, if a pie has ten times more slices (for example, in a 10:1 stock split), each slice is inversely correlated to the split (1/10th of its pre-split value). The split will also have no impact on earnings across an investor’s holdings, as a $10 earnings per share across 1 share is equivalent to $1 earnings per share across 10 shares in aggregate.  

We can see this happen across various stocks. Though the share count is retroactively adjusted for the stock split, as well as earnings per share, we can see the lack of value impact on Monster Beverage, which split its shares 2:1 in March 2023. 

We can also see this idea through Tesla, which performed a 3:1 stock split in late August 2020, and whose company value has largely stagnated in this time, especially in the context that it has been one of the greatest performing public equities of the 21st century. 

It has also underperformed the S&P 500 since the split went into effect. 

This is not to say to avoid any company that performs a stock split. Several notable companies have performed a split and whose value has risen, such as Alphabet or Amazon; however, this is not attributed to the stock split, rather, continued focus on per-share metrics moving in the right direction and gaining an increased appreciation from the market in light of these factors. 

The Non-Quantifiable "Benefits" of a Stock Split

There are several “benefits” of a stock split for a company to be undertaking, though they are difficult to precisely determine. The first of these is the strongest, though overall, these justifications are of dubious quality.

Positive Signal of Confidence: A stock can face delisting if it trades below a certain value for a long stretch (depending on the index, often a $1 threshold), and institutions typically will not buy if it is below $10 per share. A company performing a split means they may be signaling future strength in their business, which they believe will drive continued share price appreciation. 

Increased Liquidity: This is rare, as most public equities above a $1 billion market cap are highly liquid. However, a stock split does increase the accessibility to access derivatives for a given equity, since options contracts are based on an underlying benchmark of 100 shares per contract. 

Increased Access for Retail Investors: Performing a stock split reduces the price, sometimes significantly. Chipotle’s 50:1 stock split that went into effect on June 26, 2024 reduced the share price from $3,283.04 to $65.00 per share, which has been one of the largest high-profile stock splits in recent years and makes shares accessible to more individuals with smaller portfolio sizes. This is also a psychological effect that may increase a company’s short term value, but has no impact on long-term fundamentals of a business. 

Closing Thoughts

In closing, a stock split does not impact a company’s intrinsic value per share or cumulative earnings power, and investors should not be chasing the stock prices of companies that have announced a split. This is simply dividing a pizza into more slices, instead of making the pizza bigger for each slice-holder. 

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