Watch-Split Watch: Is ASML Holding Next?

Dutch company ASML Holding (ASML 0.07%) is a major player in the semiconductor industry. Its patented lithography machines produce state-of-the-art chips, including those powering the latest artificial intelligence (AI) technology. The company’s stock has thrived on Wall Street’s AI enthusiasm, making it a potential stock split candidate now that it’s trading at more than $800 per share.

The company has split its stock several times before, but it’s been more than two decades since its last traditional split, so it would make a lot of sense. However, something seems amiss at ASML and the stock, despite trading at a high share price, is down 25% from its high.

Should investors anticipate an ASML stock split anytime soon?

ASML is no stranger to stock splits

Of course, if something has happened once or more before, it is plausible that it could happen again. ASML has split its stock four times, most recently in April 2000, not including a reverse stock split in 2007:

ASML data by YCharts

Stock splits are a way for companies to reduce their stock price by proportionally increasing the number of shares. The lower price helps investors accumulate more shares, and the additional liquidity from the increased number of shares gives employees more control over how they collect their stock-based compensation. In addition, it gives the company easy publicity.

Most importantly, the stock split does not fundamentally change anything about the company or its stock. When you cut a pizza into several slices, there is neither more nor less pizza than before. Each slice represents a smaller portion of the pie. A stock split never changes the stock’s valuation.

If not then, why now?

Sometimes it’s more about sending a message than numbers. Stock splits can attract buyers with lower stock prices, but it sends a positive message when a company splits its stock at an all-time high. Kind of like: Hey, things are going well and we want more investors to participate in the good things happening here. It’s harder to send that message if ASML splits its stock while it’s down significantly from its high.

ASML’s current high is over $1,100 per share. Why would management split the stock now if they didn’t then? In any case, I would argue that splitting his stock after a 25% drop sends a message asking people to buy the stock rather than attracting investors to a good thing.

It can all seem silly, especially if you’re a long-term investor who focuses on the business behind stocks. However, there is a reason why the business channel on TV scrolls stock prices at the bottom of the screen or shows price charts when discussing a company. Right or wrong, stock prices often dictate the narrative around companies, so companies weigh all of this when considering a stock split.

Why is ASML down 25%?

The Nasdaq Compositethe benchmark US index for tech stocks, of which ASML is a part, is a few percentage points away from its all-time high. So why might ASML be so low in the first place?

Tensions between the United States and China have intensified over AI chips. ASML’s extreme ultraviolet (EUV) lithography machines are critical to producing the next-generation chips needed for AI. The United States wants ASML to restrict exports to China and cut off service on systems the company previously sold in the country. The United States cited national security reasons. In response, China has threatened the Netherlands and ASML with economic retaliation if the company implements restrictions. About half of ASML’s sales in the first half of this year came from China, so this is a potentially big deal.

Whether this will boil over and affect ASML remains to be seen. ASML is the company that builds the EUV machines, so China would need a solution if they chose not to use ASML’s equipment. In addition, it seems unlikely that the Netherlands will allow its largest technology company to suffer because of politics. Still, it’s something to monitor, and it makes sense for the stock, which peaked at an expensive price-to-earnings ratio of nearly 60, to cool in the face of it.

Is this dip a buying opportunity? It could be given ASML’s dominance in the technology that makes AI possible, though a stock split shouldn’t be a big factor in that decision. If you were rooting for a stock split, you could be waiting longer.