In recent times, stock splits have grow to be increasingly frequent on Wall Street, with firms akin to Alphabet, Amazon, and Tesla joining the trend. While stock splits may not drastically alter an organization’s valuation, they’ll serve a purpose, including enticing more individual investors to purchase shares at a cheaper price.
One tech company that hasn’t participated up to now is Meta Platforms (NASDAQ: META), known for Facebook, Instagram, and WhatsApp. But with its shares trading near an all-time high, it could potentially profit from a split. Let’s explore further.
What’s a stock split?
A stock split is when an organization increases the range of its outstanding shares while maintaining its market capitalization. For that reason each existing shareholder receives more shares, but the overall value of their investment stays unchanged.
As an example, for instance you’re an investor holding 10 shares of an organization valued at $100 each. If the corporate decides to execute a 2-for-1 stock split, your holdings would double to twenty shares, and the share price would halve to $50 each. It’s necessary to underscore that a stock split doesn’t alter the essential price of your investment; as an alternative, it adjusts the range of shares you possess. On this instance, your investment was price $1,000 before and after the stock split.
Why would an organization split its stock?
When an organization’s stock, akin to Meta Platforms, commands a high trading price, it could present a barrier to entry for certain investors. While fractional shares are readily accessible through many brokerage platforms, notable exceptions like Vanguard don’t offer this feature. In theory, a lower share price could enhance accessibility, potentially boosting demand for the corporate’s shares and thereby increasing its market capitalization.
Tesla CEO Elon Musk has previously argued that a lower stock price helps an organization’s ability to each attract and retain talent, whether through equity compensation packages or worker stock purchase plans.
An organization’s eligibility for inclusion in a price-weighted index — akin to the Dow Jones Industrial Average, which is decided from a mean of the share prices of all the businesses — is perhaps impeded by the next stock price. Consequently, stocks with higher prices, akin to Meta, face a lower likelihood of being added, since their share prices could disproportionately skew the index.
Meta has never split its stock before
Meta Platforms has never split its stock since going public in early 2012 at $38 per share. For investors who’ve held on to their shares since then, the stock has delivered a strong return of 1,133%, surpassing the benchmark S&P 500’s total return of roughly 379%.
Notably, Mark Zuckerberg, the founder and CEO of Meta, had a plan to separate Facebook’s stock in 2016. This involved making a contemporary class of shares without voting rights for most people, which may have enabled Zuckerberg to keep up control of the corporate while selling his shares to finance his charitable initiatives.
Zuckerberg withdrew that proposal in September 2017, noting that “Facebook’s business has performed well and the value of our stock has grown to the aim that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more.”
Is Meta Platforms a buy ahead of a possible stock split?
Investing in an organization solely attributable to potential for a stock split will likely be not going helpful. The corporate’s financial performance has a slightly more significant effect on its long-term stock performance. Subsequently, it’s more crucial to guage Meta’s recent business performance and consider the guidance provided by its management inside the case of constructing an investing decision.
In 2023, which Zuckerberg deemed the “12 months of efficiency,” Meta generated $134.9 billion in revenue and $39 billion in net income, marking a year-over-year increase of 16% and 69%, respectively.
Looking ahead, management provided revenue guidance throughout the range of $34.5 billion to $37 billion for the primary quarter of 2024, representing a year-over-year increase between 21% and 29%. While management didn’t offer an earnings outlook, it did note that its total expenses for 2024 are expected to be between $94 billion and $99 billion, reflecting a possible increase of between 6.6% and 12.2% from $88.2 billion in 2023.
Beyond its recent financial results and management’s guidance, Meta’s strong balance sheet with net money (money and money equivalents minus total debt) of $47 billion allows the corporate to return capital to shareholders. In 2023, Meta spent $20 billion on share repurchases, lowering its outstanding shares by 2%. The corporate still had $31 billion remaining on its share repurchasing program as of Dec. 31, 2023. Moreover, the tech company announced its first-ever quarterly dividend of $0.50 per share, equating to an annual yield of 0.4%.
One concern for Meta is how much money it spends on its Reality Labs division, the corporate’s virtual reality and augmented reality hardware and software unit. In 2023, Reality Labs was accountable for an astounding $16.1 billion loss from operations, which was 17.5% worse than in 2023. Furthermore, Meta expects those losses to “increase meaningfully” in 2024.
Investors can must attend and see whether Meta’s big bet on Reality Labs pays off. Throughout the meantime, Meta is producing strong revenue and earnings growth while returning capital to shareholders. Given its position as a frontrunner in social networking, growth investors could possibly be smart to present it some thought for his or her portfolios — stock split or not.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Idiot’s board of directors. Collin Brantmeyer has positions in Alphabet and Amazon. The Motley Idiot has positions in and recommends Alphabet, Amazon, Meta Platforms, and Tesla. The Motley Idiot has a disclosure policy.
Stock Split Watch: Is Meta Platforms Next? was originally published by The Motley Idiot