What if I told you there is an artificial intelligence (AI) semiconductor stock that has handily outperformed Nvidia, Advanced Micro Devices, Broadcom, and Taiwan Semiconductor Manufacturing over the last year?
Shares of memory and storage chip specialist Micron Technology(NASDAQ: MU) have blasted 290% in just the past 12 months — making it one of the premier technology stocks in the Nasdaq-100 index. Zooming out even further, Micron stock has soared more than 600% throughout the entire AI revolution.
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With so much momentum behind it, could Micron stock be set up for a split? Let’s dig into the mechanics of how stock splits work and assess why Micron could be a good candidate right now.
Image source: Micron Technology.
“Stock split” is a financial term that sounds complicated, but in reality understanding this concept is quite easy. The first component of a stock split that investors need to understand is the underlying ratio. For example, a company may announce that it’s going to complete a 10-for-1 split.
From there, it’s important to understand how this ratio impacts a company’s stock price and outstanding share count. Let’s assume that a stock is trading for $1,000 per share and has 1 million shares outstanding. Under these conditions, the company’s market value is $1 billion.
In a 10-for-1 split, the stock price would be reduced by a factor of 10 while the share count would rise by that same multiple. In this case, the split-adjusted share price would fall to $100 while the number of outstanding shares would increase to 10 million.
Do you see what happened here? The market value of the company remains the same. The big takeaway to understand is that stock splits do not change the underlying valuation of a company.
Image source: Getty Images.
If stock splits do not change the value of the company, then why do businesses even bother with them? Usually, it boils down to investor psychology. While this way of thinking is not entirely correct, many investors perceive a company’s worth purely through the lens of its stock price. In other words, if a stock trades for $1,000 per share it’s generally seen as “expensive” while a $10 stock is viewed as “cheap.”
If a company has experienced an abnormally high return in an otherwise short time frame, like Micron has, investors may start to think they’ve missed their chance as the stock has gotten pricey. Again, from a valuation perspective, this is not always the case.
Nevertheless, management understands these psychological dynamics. And if a stock’s trading volume is thinning or retail investor ownership is decelerating, a company may choose to split its stock in hopes of broadening its investor profile by making shares more accessible.
So far in the AI revolution, two of Micron’s chip peers, Nvidia and Broadcom, have engaged in stock splits. In the graph below, these respective splits are annotated by the colored circles with the letter “S” in the middle. Per the trends illustrated, both Nvidia and Broadcom stocks have witnessed meaningful gains since their stock splits.
With that said, investors should keep in mind one point above all else: Stock splits don’t do much to change a company’s underlying operation. In other words, Micron doesn’t gain much should it choose to split its stock. Moreover, given stock splits do not change the valuation profile of a company, investors shouldn’t worry about buying Micron stock at $400 today or a perceived “lower” price in the future.
Given accelerating AI infrastructure investment from major hyperscalers, Micron’s growth prospects should remain robust over the next several years. For these reasons, I see Micron as a compelling stock to buy and hold throughout the AI infrastructure boom — regardless of whether a split is on the horizon or not.
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Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
