What to do if Amazon, NVIDIA or Netflix split their shares in 2021
Distribution of stocks created a million kilometers of tracks in 2020. Apple (NASDAQ: AAPL) did a 4-to-1 split at the end of August, and You’re here (NASDAQ: TSLA) performed a 5-to-1 split on the same day. Apple and Tesla both had reason to split, but these stocks did absolutely nothing to increase or decrease their stock returns.
Let me tell you why Apple and Tesla bothered to do stock splits in 2020, then I’ll show you what to do if Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), or NVIDIA (NASDAQ: NVDA) decide to do the same in 2021.
Apple and Tesla set the tone
Apple had 4.3 billion shares outstanding on August 30. The next day, the number of shares rose to 17.1 billion heels, with each existing share turned into a total of four shares. Apple’s business has not changed in any way and the total value of the company has also remained the same, except for the normal price fluctuations of a fairly normal day on the stock market.
The entire pie was simply sliced into more shares, which caused the price per share to drop from about $ 500 to $ 125. If you owned $ 10,000 in Apple stock before the split, you still had $ 10,000 in Apple stock after that. You just got 80 stocks instead of 20, which is the same total value.
The same reasoning applied to Tesla on August 31. A share of Tesla cost around $ 2,500. The split split each original stock into five new ones, each trading around $ 500. Five times $ 500 is another $ 2,500.
The main idea behind stock splits is to keep the price of a single stock within reach of a larger population of individual investors. It wasn’t Apple’s first rodeo. The company has completed a total of five stock splits over the years, a ratio of 224 to 1. Without these stock splits, a single stock would cost $ 29,950 today.
Many retail investors can’t always find this kind of dough at the right time to buy Apple shares. Many online stock brokers will allow you to buy a fraction of a stock when an entire stub is just too much, but this option requires extra steps and some investors don’t even know it. From this perspective, it really makes sense to keep stock prices reasonably low through occasional stock splits.
This was Tesla’s first stock division, but we Tesla owners hope the future holds many more divisions as the stock price continues to soar.
Why these three companies could be the next ones
Amazon, Netflix, and Nvidia are three of the most expensive tech stocks on the market today. Netflix has already executed two splits for a total ratio of 14: 1. Trading at $ 524 a share today, the stock is approaching the $ 700 range where the last 7: 1 split was made in 2015. I wouldn’t be surprised to see another division of Netflix someday soon, assuming the 62% price gains in 2020 turn into solid growth next year.
Nvidia had two quick splits in 2006 and 2007, adding a 2: 1 ratio. Management’s attitude towards stock splits is unclear, but stocks get a little expensive after a gain massive 1,470% over the past five years.
And then there is Amazon. The leading e-commerce and cloud computing company split its shares three times in 14 months for a total ratio of 12 to 1. This flurry of share number adjustments fell in 1998 and 1999, there are more than 20 years. CEO Jeff Bezos said Amazon might “consider” the idea of a stock split from time to time, but it was not an important plan when Amazon shares traded at $ 1,000 per share in 2017.
The company could make a strong case for its membership in the venerable Dow Jones Industrial Average the index if its stock prices were adjusted downward, in the vein of Apple taking place in the Dow Jones in 2015 after carrying out a 7: 1 stock split in 2014. The value of this index is weighted by the each company’s stock price, rather than the total market value used by most other stock indexes.
If the Dow kicked out its most expensive stock today and inserted Amazon instead, Bezos’ company would represent over 40% of the index’s value. Amazon’s price movements would move the index more than 11 times farther than the price movements of the second most expensive member. If Jeff Bezos has any ambition to bring Amazon into the exclusive Dow Jones club, he should start with a splashy stock split.
Your best bet: do nothing
I wouldn’t be surprised to see Amazon, Netflix, and Nvidia announce stock splits in 2021, but those announcements wouldn’t affect my investment decisions at all. I do not plan to profit from splits in any way as there will be no price movements. Of course, Apple’s stock rose sharply in the summer of 2014, but that was due to the release of the popular iPhone 6. Netflix grew 129% in 2015, thanks to the worldwide launch of streaming services and 17 million new subscribers. You should not give credit for these market movements on the stock splits that have just started in these particular years.
You see what I mean. Business plans, product launches and smart financial planning can create shareholder value. Stock splits and other worthless accounting tricks do nothing for your long-term stock returns.
You shouldn’t worry about whether Netflix, Amazon, and Nvidia decide to split their shares in 2021. If their shares are over your budget today, consider buying fractional shares. The rest is just a headline light show – lots of flash but no substance.
A successful investment involves holding stocks of high-quality companies for a long time, ignoring stock splits and other empty distractions.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.