Big tech companies haven’t benefited much from their stock splits this year. And understandably so since stock splits themselves don’t add value for investors, nor do they make a stock a better buy. It’s purely an aesthetic move in an effort to potentially reach investors who can’t buy fractional shares. But by and large, it shouldn’t change your outlook for a company.
Stock splits may have been a good way to build up hype while investors were buying up meme stocks last year. But now, as there’s been a shift more toward value, this type of move hasn’t been paying off for companies in the ways they may have hoped it would.
Of course, there are always exceptions. Let’s look at one.
A split that exceeds expectations
There wasn’t much excitement around medical device maker DexCom (DXCM 1.98%) splitting its shares in June. It certainly wasn’t on the same level as either Amazon and Shopify deploying stock splits. But following its 4-for-1 stock split, DexCom’s stock closed at $68. Today it’s around $91, an increase of 34%.
The healthcare stock‘s rally over the past few months has been gradual and the gains aren’t likely due to the stock split. Investors have likely been gravitating toward safe growth stocks (e.g. other than big tech) with more definitive long-term potential, and the need to manage diabetes is only going to increase as more people live with the disease. DexCom’s continuous glucose monitoring devices are popular among people with diabetes, as they make it easy to stay on top of glucose levels.
The growth was evident in the company’s second quarter, ended June 30, when sales rose 17% year-over-year to $696.2 million. The company has been expanding its business globally, with product launches in the U.K. and Spain recently unlocking new opportunities for the business. Overall, the company’s business looks promising, and although DexCom trades at a forward price-to-earnings multiple of more than 100, it’s still a profit-generating business with loads of long-term potential; that multiple could come down over the years as DexCom continues to grow.
For long-term investors, this remains a promising stock to buy and hold.
Big tech hasn’t been doing nearly as well
Amazon deployed a massive 20-for-1 stock split in early June. The day of the split, it closed at a price of $124.79. Now at $144, its shares are up 15%, but that was due to the company’s recent earnings report, which got investors excited. Prior to that, the stock was trading at around $120, and was down since its stock split.
Another big stock split came from Shopify, which split its shares on a 10-for-1 basis in late June. At just over $33, it has climbed to a value of more than $42, for a gain of 27%. But here, too, the stock was trailing lower before the release of its latest earnings report, which may have not been as bad as what investors were expecting. Prior to that, the stock was trading at around $37, and even dipped to less than $32 on news that it was laying off 10% of its employees.
Focus on fundamentals, not stock splits
The performance of these stocks over the past few months suggests that investors are looking at deeper reasons to buy and sell shares of Amazon, Shopify, and DexCom. Earnings reports and news of layoffs have had much bigger impacts on Amazon and Shopify than their stock splits. DexCom’s steady increase over the past few months also doesn’t show that it benefited from a surge due to its stock split.
Stock splits don’t improve a company’s prospects or make it look like a better deal. While the share price may be lower, that doesn’t mean a stock offers better value than before the split. For investors, this serves as an important reminder not to get caught up in the hype surrounding stock splits, or anything else that has a negligible effect on a business.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool recommends DexCom and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.