Here are 5 things smart investors should know about Super Micro Computer’s 10-for-1 stock split

IT infrastructure company Super Micro Computer (SMCI -0.82%) has been a favorite of artificial intelligence (AI) investors over the past year.

Earlier this month, Supermicro reported financial results for the fourth quarter and full fiscal 2024 (ended June 30). The earnings report was a mixed bag, but management surprised investors by announcing a 10-for-1 stock split.

Let’s explore how the stock split works and recent examples from comparable AI companies to help form a thorough investment thesis around Supermicro right now.

1. How does the stock split work?

A stock split is simply a mechanism of financial engineering.

When a company executes a split, its outstanding shares increase by the number in the split ratio (in the case of Supermicro, the number of shares will multiply by 10 after its 10-for-1 split). Conversely, the company’s stock price should subsequently decline by the same factor.

Because of this, stock splits do not inherently change a company’s market capitalization or valuation. But as I’ll detail below, news of splits often attracts tremendous attention, which can cause abnormal trading volatility for the stock in question.

2. Why it is Supermicro dividing his stock?

AI has become all the rage in the tech sector in the last year and a half or so. Supermicro’s close relationship with semiconductor darlings Nvidia and Advance Micro Devices helped propel his business to a new level and solidified it as an emerging growth opportunity for AI enthusiasts. Since January 2023, the stock is up 652% at the time of writing.

One of the main reasons a company will split its shares is to make them more affordable. At more than $615 per share, many investors likely perceive Supermicro as overpriced. If the 10-for-1 split were to happen today, the stock price would drop to about $62.

Again, while you would technically be buying into Supermicro at the same valuation, investors may perceive the stock as less expensive and be more inclined to buy.

Image source: Getty Images.

3. How are stock splits handled?

Brokerage firms such as Vanguard, Fidelity or Charles Schwab it takes care of the background mechanics.

Let’s say you already own 10 shares of Supermicro at $500 per share. After the October 1 split, your brokerage account will automatically reflect your position as 100 shares purchased at $50 per share.

No work is required on your part.

4. Has Supermicro ever split its stock?

Supermicro’s upcoming 10-for-1 split marks the first time the company will split its stock.

5. Should you buy Supermicro shares before or after the split?

As we alluded to earlier, stock splits can get a lot of attention, which can affect stock price dynamics.

For example, excessive momentum can affect a stock around the time of its split. As day traders come into the stock, the stock price often begins to rise quite quickly.

This activity can lead to significant valuation expansion in a short time, making the stock a riskier buy. I would encourage investors to be patient until the momentum traders come out and take quick profits. The last thing you want to do is buy a stock at a high valuation and be left holding the bag when traders suddenly sell off.

Data by YCharts.

The chart above illustrates how Nvidia and Broadcom The stock moved around its own 10-for-1 split earlier this year. Broadcom announced its split on June 12, and Nvidia on May 22.

Investors can see that shortly after making these announcements, both Broadcom and Nvidia experienced transient shocks to their share prices.

However, both stocks have he refused following the execution of their respective divisions.

As a word of caution, I wouldn’t suggest hunting for a perfect time to buy the Supermicro. That said, recent examples highlight how buying too close to the split date could lead to more volatility than usual.

A more prudent strategy might be to wait until after the split occurs and watch the price action unfold. If there will be an immediate sale after the split, you may be able to buy at a more reasonable valuation.