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

IT infrastructure company Super-microcomputer (SMCI -0.82%) was a favorite among artificial intelligence (AI) investors last year.

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

Let’s examine how stock splits work and look at examples of recent stock splits at comparable AI companies to develop an informed investment thesis on Supermicro now.

1. How do stock splits work?

Stock splits are merely a mechanism of financial engineering.

When a company undergoes a split, the number of shares outstanding increases by the number in the split ratio (in Supermicro’s case, the number of shares increases tenfold after the 1-for-1 split). Conversely, the company’s stock price should subsequently decrease by the same factor.

For this reason, stock splits do not necessarily change a company’s market capitalization or valuation. But as I’ll explain in more detail below, news of splits often attracts excessive attention, which can lead to unusual trading volatility for the stock in question.

2. Why is Supermicro split his shares?

AI has become a trend in the technology sector over the past year and a half. Supermicro’s close relationship with semiconductor darlings NVIDIA And Micro devices has helped take the business to new levels and establish it as a new growth opportunity for AI enthusiasts. Since January 2023, shares have risen 652% at the time of this writing.

One of the main reasons a company splits its stock is to make it more accessible. At over $615 per share, many investors probably think Supermicro is too expensive. If the 10-for-1 split were to take place today, the stock price would fall to about $62.

Even though you would technically buy Supermicro at the same value, investors may view the stock as less expensive and therefore be more inclined to buy it.

Image source: Getty Images.

3. How are stock splits handled?

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

For example, let’s say you already own 10 shares of Supermicro at $500 each. After the split on October 1, your brokerage account will automatically reflect your position as 100 shares that you purchased at $50 each.

No work is required on your part.

4. Has Supermicro ever split its stock?

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

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

As I have previously indicated, stocks from stock splits can attract a lot of attention, which can impact stock price momentum.

For example, a stock may be experiencing excessive momentum at the time of its stock split. When day traders flock into the stock, the share price often begins to rise quite quickly.

This activity can cause a significant increase in value in a short period of time, making the stock a riskier buy. I would advise investors to be patient until momentum traders have exited and booked their quick profits. The last thing you want to do is buy a stock at a high valuation and then be left on the losing side when traders suddenly sell their shares.

Data from YCharts.

The graphic above shows how Nvidia and Broadcom The stocks moved around their own 10-for-1 splits earlier this year. Broadcom announced its split on June 12, Nvidia on May 22.

Investors can see that both Broadcom and Nvidia experienced fleeting declines in share prices shortly after the release of these announcements.

However, both stocks have rejected after completing their respective demergers.

As a word of caution, I would not recommend looking for the perfect time to buy Supermicro. However, recent examples show that buying too close to the split date can result in higher than usual volatility.

A more cautious strategy might be to wait until after the split and watch how the price moves. If there is a sell-off immediately after the split, you may be able to get in at a more reasonable price.