Stock Split: Why is it popular amongst FAANG Stock?
Stock Split: Why is it popular amongst FAANG Stock?
22 December 2022
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Stock splits have been growing in popularity over the past two decades. At first, many people find them alarming as they think it relates to share dilution; however, that isn't true. Stock or share splits are actually beneficial to the shareholders and investors at large.
That's why we've been seeing giants like Tesla and Apple split their stock over the past couple of years. In fact, most big tech companies such as Facebook, Amazon, Apple, Netflix, and Google (FAANG stocks) have all split stock since they started.
Facebook - surprisingly, Facebook (now Meta) has never split its stock
Amazon - has had 4 splits since its inception
Apple - 5 splits have been recorded for this giant
Netflix - implemented two splits at its price peak in 2014-2015
Google (now Alphabet) - has a total of 2 splits in its history
What is a Stock Split?
Stock or share splits mean that the company divides its existing stock into multiple shares, reducing the price of each share but not the company's market capitalization. Let's say you have a $100 bill and want to split it.
You exchange the $100 bill for 5 $20 bills or 2 $50 bills. Now, the value you hold in your possession is the same as before. You've merely divided the value into different denominations. The same concept applies to splitting stock.
A stock or share split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to its existing shareholders. This is typically done to make the stock more affordable for individual investors, as the stock price is adjusted in proportion to the increase in the number of shares.
For example, if a company were to implement a 2-for-1 split, each shareholder would receive an additional share for each share they currently hold, and the price of the stock would be halved.
There are several different types of splits, including standard 2-for-1 and 3-for-1 as well as more complex ones like 4-for-1 or 5-for-1.. No matter the type, the overall effect is the same: the number of outstanding shares increases and the price per share is adjusted downward in proportion to the rise in shares.
Why Do Companies Implement Them?
There are several reasons why a company may decide to split its stock. For example, when a company's stock becomes too expensive, the board of directors may choose to proceed with a split to decrease the stock price.
By doing that, they increase the number of outstanding shares, thereby reducing the price of each share and making it more attractive to investors. In addition, some companies believe that a lower stock price can lead to increased liquidity and trading volume, as it may appeal more to traders and investors.
Another reason for implementing a split is to bring the stock price back in line with industry norms. For example, suppose a company's stock price has soared significantly higher than its industry's average stock price.
In that case, a split may be implemented to bring the price down to a more "normal" level. This can make the stock more appealing to investors who may be hesitant to invest in a company with a significantly higher stock price than its peers.
For example, in 2020, Tesla initiated a 5-for-1 split bringing the share price down to about $446 from the previously whopping $2,230. Similarly, Apple executed a 4-for-1 split reducing the cost of its shares from $460 to roughly $115.
It's worth noting that while a split can make a stock more attractive to individual investors, it does not impact the company's underlying value or the value of an individual's investment. The value of a shareholder's investment is determined by the total number of shares they own multiplied by the price per share.
Therefore, if a company were to implement a 2-for-1 split, thevalue of an individual's investment would remain unchanged, even though the number of shares they own would double, and the price per share would be halved.
Potential Downsides of Splitting Stock
While splitting stock can have many benefits, it can also have some potential downsides. One of the most common drawbacks is the fact that they can cause increased volatility. This isn't really a drawback for investors looking to capitalize on the opportunity in the short-term, but it may be a negative for portfolio investors as they know that such investors are less likely to consider a long-term commitment.
Still, most investors view splits as an indicator that the company's doing well. Especially since splitting the stock allows a company to increase its stock liquidity. Stocks that trade at higher prices often come with high bid/ask spreads, potentially making them less favorable.
Examples of FAANG Stocks in 2020-2022
FAANG, which stands for Facebook, Apple, Amazon, Netflix, and Google (now Alphabet), is a group of highly successful technology companies widely popular among investors. Here are a few examples of FAANG stock splits in recent years.
In August 2020, Apple announced a 4-for-1 split, which took effect on August 31, 2020. This split adjusted the price of Apple's stock downward by dividing the price by four.
Apple's decision to split its stock was seen to make it more accessible and attractive to a wider range of investors. Before the split, Apple's stock price had reached record highs, making it less affordable for individual investors. Overall, Apple's 2020 share split was a successful move that was seen as a positive sign for the company's future growth prospects.
Netflix split its stock on July 14, 2015, creating a seven-for-one split. This means that the stockholder received six additional shares for every share of Netflix stock. The number of outstanding shares increased from about 53 million to about 370 million due to the split. The stock price was adjusted accordingly, with the price per share decreasing sevenfold.
Before the split, Netflix stock was trading at over $700 per share, which was out of reach for many individual investors. After the split, the stock price was around $100 per share, making it far more accessible.
After the split, the stock price of Netflix fell, but it quickly recovered and began to rise. In the years following the split, Netflix's stock price experienced significant growth. The company has benefited from strong financial performance and the increasing popularity of its streaming service. As of December 2021, Netflix's stock price was around $500 per share.
Amazon's decision to split its stock in March 2022 was also met with positive reactions from investors. The 20-for-1 split divided the stock price by twenty and increased the number of shares outstanding by the same factor. This made the stock more accessible and attractive to a wider range of investors as the price per share decreased by more than 60%.
Amazon shares were revalued to $120 per share after trading well above $2,000 per share prior to the split.
In February 2021, Alphabet, the parent company of Google, announced a 20-for-1 split as part of its fourth-quarter revenue report for that year. The announcement caused the stock price to rise by more than 8%, reaching nearly $3,000. The split was carried out on July 18, 2022.
This share split marks only the second for Google since its 2004 IPO. 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.
When all is said and done, stock splits don't fundamentally affect the underlying value of a company. Rather they boost investments as the stock becomes more affordable. In the best-case scenario, a share split results in renewed interest and growth as more and more investors flock to buy stock that has just become more affordable. If a company is splitting its stock for reasons other than affordability, it may be worth digging into the fundamentals and ensuring that everything is above board.
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