Stock splits are great news for investors in American tech shares

8th June 2022 14:29

After colossal gains in recent years, US tech shares have become unaffordable for many retail investors. Not any more.

A summer of stock splits that is set to involve Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOGL) has gained momentum after Shopify (NYSE:SHOP) got the go-ahead to make its shares more accessible to retail investors.

Approval at the e-commerce giant’s AGM yesterday means shareholders can expect nine shares for every one held, effective after the close of trading on 28 June.

Its stock split addresses the challenge facing many ordinary investors who have found it hard to trade shares in companies whose valuations have soared in recent years.

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Shopify, for example, listed with an IPO price of $17 in May 2015 but traded above $1,600 in November and is still several times higher at $380 despite recent tech sector volatility.

Its market capitalisation stays the same after the split but the trading price is reset to a much lower level, providing a potential short-term uplift as new investors get on board.

Shopify is not alone in doing so as shareholders of Google owner Alphabet recently approved plans for a 20-1 share split due to take place from 15 July. Alphabet is now the only one of the FAAMG stocks trading above $1,000 a share after Amazon recently completed its own split.

Tesla holds its annual meeting in early August, when investors will be looking to see if a stock split is among the resolutions. The electric car maker said in March that it planned to do so for the second time in two years but has yet to provide further details.

Tesla shares rose 150% in the year after its last split in August 2020, having jumped 508% in the 12 months prior to the move.

In fact, research by Bank of America covering stock splits since 1980 shows that companies see average returns one year later of 25% compared with 9% for the wider market.

It said recently: “Underlying strength in the company is a primary driver of elevated prices. Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy.”

This summer’s flurry of activity comes after just 28 in the past five years, compared to a peak of 346 between 1996 and 2000.

They are particularly rare in the UK, despite plenty of stocks trading with lofty prices.

The cost of buying one share in Spirax-Sarco Engineering (LSE:SPX) or AstraZeneca (LSE:AZN) is more than £100 in the FTSE 100, while other popular stocks above £60 include Next (LSE:NXT), Games Workshop (LSE:GAW), London Stock Exchange (LSE:LSEG) and Paddy Power owner Flutter Entertainment (LSE:FLTR).

Previous moves have tended to focus on consolidating the large number of shares in issue, such as Royal Bank of Scotland in 2012 when it gave shareholders one for every 10 held. The move shifted the share price from 20p to 200p in an effort to reduce the large percentage movements and considerable volatility in the group's shares.

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