Stock Splits: A History Lesson | Family Financial Partners

Stock Splits: A History Lesson

By: David Smyth, September 3, 2020

This week, I want to talk about stock splits, as I've been getting a few questions about what this means. Apple recently split their stock four-for-one, and Tesla split five-for-one. That means that if you used to own one share of Tesla worth, say, $2,000, you now have five shares worth $400 each. Stock splits certainly aren't anything new, and were common during the late 1990s tech boom (more on that later). The split does not change the value of Tesla. What it does do is allow an investor who couldn't afford one share of Tesla at $2,000 to buy one share that's now valued at $400. Splits mean more shares, not more (or less) value. 

 

Institutional investors (think Fidelity and Vanguard) have for years discouraged large companies from stock splits because each share traded creates an additional cost. However, with the dawn of low- and even no-commission trades, I believe we're on the cusp of what will one day be known as stock split mania. 

 

Imagine with me for a second the excitement that would ensue if Netflix, Amazon, Microsoft and Costco all split their stock. It mathematically doesn't change the value of any enterprise, but it would certainly drum up more media coverage and excitement pre and post said splits. I think we can all agree that the media loves to jump on anything these days. But I digress. 

 

Back to the financial markets. Now that you understand stock splits, the question becomes, do the Apple and Tesla splits signal the top of the tech market, similar to the final Qualcomm split we witnessed back in 1999? 

 

Looking back to 1999, which happens to be the year I earned my first securities license after two years in the industry, I had a front-row seat to what happened. The current action in Tesla, which seems to only go up, looks similar on the surface to what happened with Qualcomm. Of course, Qualcomm was up more than 2500 percent from 1998 through the end of 1999, and Tesla is only up about 1200 percent. If it doubles again I'll look like an idiot, but I'll take the risk. 

 

The companies are similar in that Qualcomm was the face of the technological changes that were promised to occur over the next decade in our country, and today, there's a good chance that smart phone in your pocket is powered by a Qualcomm chip. They have been major players in the development of 4G and 5G technology. Back in 1999, the idea of everyone walking around with a phone that talked back to you, gave you directions, helped make dinner reservations and buy event tickets seemed pretty George Jetson. And yet, here we are. 

 

These days, the idea of battery-powered cars and trucks and putting humans on Mars seems pretty futuristic too, and I'm not saying that's all going to happen. But just as Qualcomm's valuation didn't matter (until it did), the valuation of Tesla doesn't matter. Until one day, when it will. When it did finally matter for Qualcomm, it took 14 years before its stock made a new high. During those years, many things Qualcomm was focused on came to fruition, and it remains a highly successful company. However, from the moment of that last split, Qualcomm was a terrible investment for anyone who bought on the hype that it would only go up. 

 

So, the question now becomes, is the general tech bubble many say we're currently experiencing the same as what we saw in 1999? The simple answer is, well, I like it when stocks go up. But I'm also concerned when they go up too fast and valuation doesn't matter. Let's take Zoom for example. We've all become more familiar with Zoom than we ever wanted to, but Zoom is at a market cap of $120 billion on $2.4 billion in revenue - not even earnings. That's 133 percent more than the entirety of Target, a company valued at $74 billion and with significant earnings, not just revenue. 

 

I'm not trying to knock Zoom. We all use it and love it. (Well, that may be a stretch.) But I'm concerned about the valuations that exist. Again, after two decades in this business, I've learned that valuations don't matter - until they do. 

 

No one can argue that Amazon, Apple, Google and Facebook are significantly more profitable and financially secure than the companies that existed back in '99 - think Pets.com, Flowers.com, BarnesandNoble.com (which did not in fact take down Amazon as predicted). This is why, as tech moves higher, we prune those positions, just as a gardener prunes mature flowers. 

 

So where will the market top be in tech? I'm watching for two things. One, significant insider selling at tech companies. If the employees don't think it's a good investment, well, I probably don't either. And two, the significant number of IPOs (initial public offerings) coming to market during the remainder of the year (Airbnb!). I don't have anything against companies existing on the stock exchange. But if a new company lists, something has to sell to create the funds to buy. Portfolio managers will typically prune the largest positions, and those tend to be tech stocks that have done well. I'm not saying to sell. I'm simply saying that history often repeats itself, and you might want to read up on what happened between 1999 and 2001. 

 

The views and opinions expressed are that of the author and do not necessarily represent the opinion of any broker dealer.  Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal.

 

Family Financial Partners | Growing Wealth, For Generations ™