Earlier this month, Tesla announced a 1-for-5 share split, which was preceded by Apple’s 1-for-4 split in July. Tech stocks have rallied to all-time highs in 2020. Investors have bet on tech stocks during the coronavirus pandemic. However, the sharp rise has also meant that some tech stocks are getting a little too expensive for retail investors. After Tesla and Apple, several other U.S. companies might be due for a stock split in 2020.
A stock split is one strategy that companies deploy to increase liquidity in their stocks. With a stock split, the share price drops to reflect the split and becomes cheaper for investing. For example, Tesla shares would be around $300 adjusted for the split from around $1,500 currently. While shares become cheaper to buy after the split, the amount is in absolute dollar terms. The split does not impact the stock’s valuation.
Which companies are due for stock splits in 2020?
Jim Cramer has identified 10 stocks that look like they are due for splits in 2020. The Mad Money host listed Amazon, Alphabet, Chipotle, Netflix, Nvidia, Adobe, Costco Wholesale, Home Depot, Facebook, and Microsoft as the stock split candidates. Cramer said, “If you want the market to keep climbing, these ten companies — and many more — need to start taking their cue from … Tim Cook and Elon Musk.” He also said, “Remember, the size of the price tag matters with this [young investing] crowd” and “you want this no-commission paying crowd in your stock.”
Looking at the YTD price action, Amazon, Alphabet, Chipotle, Netflix, Nvidia, Adobe, Costco Wholesale, Home Depot, Facebook, and Microsoft are up 71 percent, 13 percent, 39 percent, 47 percent, 95 percent, 35 percent, 15 percent, 29 percent, 26 percent, and 33 percent, respectively. If these companies split their shares, Cramer said, “This new cohort of investors, the ones who love low-dollar amount stocks, will start buying and holding these best-of-breed names rather than the darned penny stock.”
Stock split history
Most of the companies have a share split history. Amazon split its shares in 1999. With Amazon's share price above $3,000, it looks like the ripest candidate for a split in 2020. Alphabet is the second most expensive share on the list with its stock price around $1,500. Alphabet split its shares in 2015. Chipotle has not split its shares since its IPO in 2006. Currently, Chipotle shares trade above $1,100.
Netflix shares trade near $500. The last time the company split its shares was in 2015. Nvidia is near $450 with its last split in 2007. Adobe shares also trade near $450 with the last split in 2005. Costco's share price is around $330. The company split its shares in 2000. Home Depot split its shares in 1999. Currently, Home Depot shares trade around $280. Facebook came up with its IPO in 2012 and has never split its shares. Right now, Facebook trades above $250. Microsoft trades just above $200 with its last split in 2003.
Tesla's stock split
While liquidity helps increase the price discovery and leads to better retail participation, share prices are a function of earnings in the long term. Tesla stock rallied sharply in June and July due to the hope that it may be included in the S&P 500. However, the shares have pared the gains even though Tesla is eligible for inclusion in the S&P 500. While the stock rallied again on stock split news, Tesla would have to increase its earnings to keep the momentum going.