Wall Street’s Split Strategy: A Boost for Stocks

Wall Street is currently riding the wave of two prominent trends; the red-hot artificial intelligence (AI) sector and the strategic implementation of stock splits.

Stock splits have long been a tool used by companies to make their shares more affordable without affecting market capitalisation or operating performance. There are essentially two forms of stock splits: a forward stock split which serves to lower the share price, and a reverse stock split which is often implemented to increase the share price, typically to satisfy exchange listing requirements.

In recent times, forward stock splits have been in the spotlight, not just for their ability to make shares more accessible to a broader range of investors, but also for their historical performance following such corporate actions. According to research by Bank of America Global Research, companies that announce forward splits tend to outperform, averaging a return of 25.4% in the twelve months succeeding the split announcement.

This trend in a company's value post-split announcement could benefit investors in companies like Nvidia (NASDAQ: NVDA), the AI industry leader that has seen its market cap swell and recently went for an aggressive 10-for-1 forward stock split. A primary driver for Nvidia's growth has been the escalating demand for its graphics processing units (GPUs) in high-compute data centers—a crucial component for powering AI applications.

Another noteworthy mention is Chipotle Mexican Grill (NYSE: CMG), which has opted for a 50-for-1 stock split, a move aimed chiefly at increasing investor accessibility. Chipotle has attributed its success to its streamlined food preparation processes and a concise menu, which have appealed to a vast array of customers.

Broadcom (NASDAQ: AVGO) is yet another example of a company leveraging a stock split. The networking solutions trailblazer is capitalizing on its pioneering status in the AI networking domain with a 10-for-1 forward stock split, thus following a similar strategy to Nvidia and Chipotle to possibly boost their stock performance.

Williams-Sonoma (NYSE: WSM), the venerable home furnishings retailer, isn't new to this tactic either. The company has scheduled a 2-for-1 split for July 2024, marking its eighth split since its initial public offering (IPO). Since that IPO in 1983, Williams-Sonoma has boasted a remarkable growth trajectory with stock value skyrocketing by over 27,000%. The company's sustained success has been supported by its strong ecommerce presence and its targeted reach towards the more affluent consumer segments.

However, Williams-Sonoma's performance comes with a caveat; sales growth has begun to plateau in recent years. Yet, the company maintains its emphasis on making stocks more purchasable for investors and its workforce. It's also worth highlighting that Williams-Sonoma has noted improved margins, a direct result of its ecommerce ventures.

In the climate of stock market fluctuation and technological disruptions, stock splits are increasingly being viewed as a strategic play to sustain investor interest and potentially bolster stock performance.