Technology giant Microsoft (MSFT) has a long history with the stock market, so stock splits are nothing new to them.
The company performed nine stock splits from the late 1980s to the early 2000s. However, there have been no further splits since then.
Today, Microsoft's stock price has reached more than $400, thanks to its breakthrough growth in cloud computing and artificial intelligence (AI), pushing the stock value to new highs.
This trend is likely to continue for a long time. Does a stock split really make Microsoft a more attractive investment? Here's what you need to know to better understand the issue.
What does a stock split mean?
First, a stock split occurs when a company decides to divide the value of its existing shares into multiple shares of lower value, in order to increase the number of shares outstanding.
For example, if a stock is trading at $100, and the company decides to do a 5-for-1 stock split, the stock will be divided into five shares at $20 each.
In reality, the total value of the investment does not change. Whether it is one stock at $100 or five stocks at $20, the total value is the same.
This key point needs to be emphasized: stock splits only reduce the unit value of each share without affecting the real value of the company.
When a company performs a stock split, each new share represents a smaller portion of the company's revenue, earnings, and equity.
Therefore, although the post-split stock price appears lower, it is actually a change in form and not a change in the fundamental value of the company.
So why do companies choose to split their stocks? The main purpose is usually to increase the liquidity of their shares. When the stock price is high, it becomes more difficult for investors who do not have a lot of capital available to accumulate shares.
Employees who receive stock compensation may also be reluctant to sell their shares if the price rises. Having more shares at a lower price makes buying and selling shares easier for both investors and employees.
Why does a stock split make sense for Microsoft?
Microsoft underwent several stock splits from the late 1980s to the early 2000s, a sign of the stock's outsized performance. Between 1986 and 2000, Microsoft's stock price rose nearly 60,000%, before the Dot-Com market collapsed.
The stock price then plummeted during the crisis and took 17 years to return to its 2000 levels. This helps explain why Microsoft has only done one stock split since then.
Data by YCharts
In early 2010, Microsoft introduced its Azure cloud computing platform, ushering in a new era for the company. Since then, Microsoft's stock has risen 1,400%, with Azure becoming the company's largest and fastest-growing business unit.
New employees who joined the company over the years may have seen significant benefits from this increase.
Azure is currently the second largest cloud computing platform in the world . Microsoft's partnership with OpenAI, one of the leading AI developers, is accelerating the trend of moving AI computing jobs to Azure as companies increasingly adopt AI in their business operations in the coming years.
Microsoft recently announced fourth-quarter earnings results for its fiscal year 2024 that surpassed Wall Street expectations, thanks to strong growth in its gaming and cloud segments.
Microsoft stock is currently trading at a premium of 32 times projected 2025 earnings. Analysts forecast earnings per share to grow at a compound annual rate of 16% over the next three to five years.
Stock splits, by their very nature, do not change the intrinsic value of a stock, so investors should not rely solely on splits to make investment decisions.
While the stock's price-to-earnings ratio isn't cheap relative to the company's earnings growth, Microsoft is still highly regarded for offering a unique combination of quality and growth potential that's hard to find elsewhere.
Market volatility could open up better buying opportunities in the future, but long-term investors may be willing to pay a small premium to own MSFT stock now.
Source: https://diaoc.nld.com.vn/microsoft-thuc-hien-phan-tach-co-phieu-bai-toan-dau-tu-moi-196240812134531641.htm
Comment (0)