Stock-Split Watch: Is Microsoft Next?

Since last year, some big tech stocks have gone wild on the market’s enthusiasm for artificial intelligence (AI). For example, microsoft (MSFT -0.61%) has soared to more than $400 per share, making it difficult for individual investors to accumulate shares for their portfolios. There aren’t many people who have thousands of dollars to buy stocks.

This puts the company on alert for a possible stock split.

Companies splitting their shares is a common practice that can benefit investors and employees. But investors should know some important rules for stock splits.

Here’s why Microsoft could split its shares and what you need to know if this happens.

Microsoft has split up before, but it’s been a while

Stock splits aren’t just for fun; They do good things for the company’s investors and employees. For investors, a high share price makes it difficult to accumulate full shares. Many companies issue stock to employees as part of their compensation. A high share price can make it difficult for employees to control how they liquidate their shares.

Splitting shares lowers the price of the stock, reducing this problem for both buyers and sellers.

Microsoft has split its stock many times before, but all of its splits occurred many years ago. The stock split nine times from the late 1980s to the early 2000s, but hasn’t split once since. As you can see below, the share price has appreciated many times over:

MSFT data for Y Charts

The company launched Azure and the Cloud Computing age in 2010, and 2023 potentially marks the beginning of Microsoft’s next golden age, artificial intelligence (AI). A split would help investors and employees position themselves for what looks like a very bright future.

This is the most important thing to remember about stock splits.

Investors’ biggest mistake when splitting stocks is associating a lower share price with a cheaper valuation. Remember that price and valuation are not the same. In other words, investors pay a certain amount for a portion of the underlying company’s profits. Splitting the stock divides the company into more parts, but each of those parts represents less of the company’s earnings.

Analysts believe Microsoft will earn $11.60 per share this fiscal year, which, for Microsoft, ends in June. Suppose Microsoft announces a 10-for-1 split, meaning one share will become 10 smaller shares. For a $400 share, that’s 10 shares priced at $40 each. Microsoft’s profits would also be divided into 10 parts, i.e. earnings per share It would be $1.16.

the actions P/E Ratio would still be the same because $400 divided by $11.16 and $40 divided by $1.16 get the same answer: 34.5.

Are you considering buying Microsoft? Look at this

You shouldn’t buy a stock based on whether it splits or not, because that doesn’t affect the profit you get on your investment.

Instead, consider comparing Microsoft’s valuation to what its growth could look like. Today, Microsoft’s P/E ratio is about 35, and analysts expect the company’s earnings to grow on average 15% annually over the long term. That’s a pin ratio of 2.3, indicating that Microsoft is a little expensive for the growth it could get (a PEG ratio of 1 indicates a fair price).

MSFT PE Ratio (Forward) data for Y Charts

It is not a science; The company could grow faster than expected (or slower) and the narrative may be different in retrospect. A long-term horizon always helps because it gives Microsoft more time to grow in and out of stock valuation.

Whether you buy Microsoft or not, make sure you do so based on fundamentals and not a potential stock split.