Should You Buy Super Micro Computer Stock Before October 1st?

Artificial intelligence (AI) has become the biggest stock market trend in the past two years. As with many other game-changing opportunities, some stocks have produced huge gains.

Sometimes investors will pull out of stocks that have seen rapid price appreciation in a relatively short period of time. One reason for this is that the stock is perceived as overpriced given the new price. If the stock rises high enough, a company’s management team may opt for a stock split in an effort to spur new buying activity.

After a 1,870% increase in its share price in just two years, Super Micro Computer (NASDAQ: SMCI) announced a 10-for-1 stock split in early August, set to take place on October 1.

With the breakup just days away, is this a lucrative opportunity to get shares of AI’s beloved?

A trip down memory lane

During a stock split, a company will issue more shares, causing the stock price to fall. The important caveat here is the number of shares outstanding and the share price should have an inverse relationship, therefore leaving the company’s overall valuation the same as before the split.

Two of the more high-profile stock splits this year came from chip giants Nvidia and Broadcom. Let’s take a look at how trading activity performed after each company split.

1. Analyzing Nvidia’s stock split

The chart below illustrates Nvidia’s stock performance from the day its own 10-for-1 split was announced on May 22nd until the market closed on September 20th. The day the stock began trading on a split-adjusted basis (June 10) is annotated in the purple circle marked with the letter “S.”

Although the stock is up 22% since the split was announced, there are underlying trends illustrated in the chart above that are important to note. For starters, Nvidia’s stock surged in the days leading up to the split. Although this buying continued for a short period after the breakup, the euphoria appears to have been short-lived.

Throughout July and parts of August, Nvidia stock fell to levels more in line with pre-split valuations. This means that investors who bought Nvidia stock during the split effectively bought at a HIGH valuation compared to before the split, despite the emergence of a lower dollar share price.

Here’s the real kicker: Since Nvidia stock began trading on a split-adjusted basis on June 10th, the stock was down 5% at the close on September 20th.

2. Analyzing Broadcom’s stock split

Broadcom announced a 10-for-1 stock split on June 12 as part of its fiscal second quarter 2024 earnings results. Broadcom shares began trading on a split-adjusted basis on July 15.

The story continues

Shortly after the breakup was announced in June, Broadcom’s stock surged — as did Nvidia’s. Moreover, as with Nvidia, Broadcom’s share price experienced heavy selling activity shortly after the split was executed in July.

Since shares began trading on a split-adjusted basis on July 15th, Broadcom has traded flat since the market closed on September 20th.

An important conclusion regarding the division of stocks

You might be wondering why both Nvidia and Broadcom shares experienced such similar trading patterns during their respective splits.

One influence behind volatility is likely due to trading timing. Day traders often take advantage of momentum in hopes of making a quick profit. A problem here is that less sophisticated investors can follow this activity but end up holding the bag after the traders have abandoned their position.

But there have been a number of macro-level factors that have played a role in the ups and downs for both stocks, which explains why Nasdaq Composite showed similar trends over the same period.

Much of that selloff was due to changing investor sentiment around AI, with some analysts sounding the alarm that the stock may have climbed too high, too fast. Moreover, this volatility continued into September as investors eagerly awaited the Federal Reserve’s decision to begin cutting interest rates.

Is Supermicro stock a buy ahead of its upcoming split?

Like Nvidia and Broadcom, Supermicro’s stock rose following the announcement of its split in early August. However, you’ll notice that the stock is down nearly 26% since its announcement.

Supermicro’s ongoing sell-off likely stems from the combination of a mixed earnings report as well as a short report from Hindenburg Research. High capital expenditures have a noticeable impact on the company’s gross margin, leading to concerns about liquidity and long-term profit potential. Management described the margin deterioration as a short-term issue related to a new product launch and supply chain issues.

While the sale normalized Supermicro’s valuation a bit, I’m torn on whether or not it’s a good buying opportunity at this point.

The prudent thing to do is sit on the sidelines and wait until after shares begin trading on a split-adjusted basis on October 1. As time goes on, investors should get a clearer picture of the short report’s allegations, all while watching how the market reacts after the split is executed.

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Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Should You Buy Super Micro Computer Stock Before October 1st? was originally published by The Motley Fool