In recent years, stock splits have become increasingly frequent on Wall Street, with companies such as Alphabet, Amazon, and Tesla joining the trend. While stock splits may not drastically alter a company’s valuation, they can serve a purpose, including enticing more individual investors to buy shares at a lower price.
One tech company that hasn’t participated so far is Meta Platforms (NASDAQ: META), known for Facebook, Instagram, and WhatsApp. But with its shares trading near an all-time high, it could potentially benefit from a split. Let’s explore further.
What’s a stock split?
A stock split is when a company increases the number of its outstanding shares while maintaining its market capitalization. This means that each existing shareholder receives more shares, but the total value of their investment remains unchanged.
To illustrate, let’s say you’re an investor holding 10 shares of a company valued at $100 each. If the company decides to execute a 2-for-1 stock split, your holdings would double to 20 shares, and the share price would halve to $50 each. It’s important to underscore that a stock split doesn’t alter the fundamental worth of your investment; instead, it adjusts the number of shares you possess. In this example, your investment was worth $1,000 before and after the stock split.
Why would a company split its stock?
When a company’s stock, such as Meta Platforms, commands a high trading price, it may present a barrier to entry for certain investors. While fractional shares are readily accessible through many brokerage platforms, notable exceptions like Vanguard do not offer this option. In theory, a lower share price could enhance accessibility, potentially boosting demand for the company’s shares and thereby increasing its market capitalization.
Tesla CEO Elon Musk has previously argued that a lower stock price helps a company’s ability to both attract and retain talent, whether through equity compensation packages or employee stock purchase plans.
A company’s eligibility for inclusion in a price-weighted index — such as the Dow Jones Industrial Average, which is determined from an average of the share prices of all the companies — can also be impeded by a higher stock price. As a result, stocks with higher prices, such as 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 have held on to their shares since then, the stock has delivered an impressive return of 1,133%, surpassing the benchmark S&P 500’s total return of approximately 379%.
Notably, Mark Zuckerberg, the founder and CEO of Meta, had a plan to split Facebook’s stock in 2016. This involved creating a new class of shares without voting rights for the general public, which would have enabled Zuckerberg to maintain control of the company 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 point 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 potential stock split?
Investing in a company solely because of the potential for a stock split is usually not recommended. The company’s financial performance has a far more significant effect on its long-term stock performance. Therefore, it’s more important to assess Meta’s recent business performance and consider the guidance provided by its management when it comes to making an investing decision.
In 2023, which Zuckerberg deemed the “year 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 in the range of $34.5 billion to $37 billion for the first 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 potential 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 cash (cash and cash equivalents minus total debt) of $47 billion allows the company to return capital to shareholders. In 2023, Meta spent $20 billion on share repurchases, lowering its outstanding shares by 2%. The company still had $31 billion remaining on its share repurchasing program as of Dec. 31, 2023. Additionally, 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 company’s virtual reality and augmented reality hardware and software unit. In 2023, Reality Labs was responsible for an astounding $16.1 billion loss from operations, which was 17.5% worse than in 2023. Moreover, Meta expects those losses to “increase meaningfully” in 2024.
Investors will have to wait and see whether Meta’s big bet on Reality Labs pays off. In the meantime, Meta is producing strong revenue and earnings growth while returning capital to shareholders. Given its position as a leader in social networking, growth investors would be wise to consider it for their 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 Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Collin Brantmeyer has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Tesla. The Motley Fool has a disclosure policy.
Stock Split Watch: Is Meta Platforms Next? was originally published by The Motley Fool