Whenever a company announces plans for a stock split, the market generally cheers the news — but why?
Technically, a stock split only divides shares into smaller ownership stakes of the company — like a cutting pie into more slices, it doesn’t change anything about the overall size of the pie, nor the value of the company. Still, these financial maneuvers can serve a purpose. By increasing the share count and lowering the share price, they can make it easier for retail investors to buy or sell the stock.
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Market high-flyers Nvidia and Broadcom split their stocks earlier this year after their respective share prices soared to more than $1,000.
Another artificial intelligence company, Palantir Technologies (NASDAQ: PLTR) has outperformed both of them since the start of last year, soaring by more than 1,000%. Should investors expect a stock split from Palantir next?
Companies do stock splits for several reasons.
First, they make a stock more liquid (easier to buy or sell). For investors, that means they can accumulate more shares without needing tons of capital. Meanwhile, company employees who want to sell shares they have received as stock-based compensation love a split because it gives them more control over how they liquidate their shares. For example, would you rather have 10 shares worth $1,000 to sell or 100 shares worth $100 each? Having 100 smaller shares gives you more flexibility in terms of how and when you cash out.
Next, a stock split sends a confident message to the market: “Hey, investors — things are going well, and management thinks they will continue to do so.” Stock splits may not in any direct way impact a company’s fundamentals or valuation. Still, investor sentiment impacts short-term stock prices, and make no mistake: Most corporate management teams care about sentiment and share prices.
On the surface, it would make sense for Palantir to engage in a stock split. For a company’s market cap to rise by 1,000% in only two years is remarkable. Nvidia and Broadcom performed similarly, and both did split their stocks. However, Palantir is far from guaranteed to follow them.
Making it easier for average investors to buy or sell a stock is arguably the primary value of a stock split, and Palantir shares are already comfortably priced. The company went public via a direct listing in late 2020 at a reference price of $7.25 per share. Today, it trades at around $70 per share. That’s far higher than it was, but it’s nowhere near $1,000, and not so high that the price tag would hinder individual investors from accumulating a meaningful number of shares or require employees to sell their stock in inconvenient chunks.
