Stock Split Watch: Is AMD the Next?

Advanced Micro Devices (NASDAQ: AMD) has executed six stock splits since its initial public offering (IPO) in 1972. An investment of $10,000 at the IPO price of $15 per share would have resulted in 66 shares, which, after the splits, would have increased to 18,666 shares, currently valued at approximately $2.24 million.

However, it has been over 24 years since AMD’s last 2-for-1 stock split on August 22, 2000. The stock closed at $68.88 per share the day prior to that split, which adjusted the price to $34.13. Since then, the stock has appreciated by roughly 250%.

While AMD has not indicated plans for another stock split, the current trading price of around $120 per share may warrant consideration. Other prominent chip manufacturers, such as Nvidia and Broadcom, have recently undertaken stock splits. This raises the question of whether investors should anticipate a potential split from AMD in the near future.

Understanding the implications of a stock split is essential. While stock splits often generate considerable interest, they do not inherently lower the cost of a stock. Instead, they simply divide the trading price of a security into smaller units. For instance, selling a quarter of a pizza for $5 instead of the entire pizza for $20 illustrates this concept. A stock split does not change the price-to-earnings ratio or other fundamental metrics, as it merely reflects a smaller portion of the company in relation to its financial performance.

Historically, stock splits held greater significance when retail investors were limited to purchasing whole shares. However, with most major brokerages now permitting the purchase of fractional shares without commissions, investing in higher-priced stocks has become more accessible, allowing investors to utilize their available funds more flexibly.

Stock splits continue to create excitement in the financial markets, as they appear to make high-value stocks more accessible to investors. Many retail investors may prefer to purchase round lots (100 shares), which are simpler to manage compared to odd lots (fewer than 100 shares). Additionally, stock splits can lower the cost of options trading, given that each options contract corresponds to 100 shares of the underlying asset. For instance, an options contract for AMD priced at $120 is linked to $12,000 worth of shares; however, if the stock price is halved to $60, the minimum investment requirement decreases to $6,000.

Moreover, stock splits can provide companies with greater flexibility in managing their stock-based compensation plans. Nonetheless, for those who are not active options traders or employees of the company, the impact of stock splits may be minimal over time.

What investors should prioritize instead
Rather than speculating on whether AMD will gain short-term interest from a stock split, investors ought to concentrate on its recent growth trajectory and long-term drivers. AMD remains a challenger in both the x86 CPU and discrete GPU markets. Over the last decade, it has successfully increased its market share against Intel in the CPU sector by creating more energy-efficient processors and outsourcing production to Taiwan Semiconductor Manufacturing.