No, Stock Splits Will Not Do What TikTokers Tell You

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Over the past few years, as the longest bull market in history was taking place, an old and almost forgotten phenomenon suddenly returned to Wall Street: stock splits.

In 2020 and 2021, several companies like Apple and Tesla announced they’d be making stock splits to make their stock more affordable. By itself, this would be totally fine, if it wasn’t that the retail mania in the investing world has managed to speculate on such a basic accounting change too.

Because the share price of companies rallied after announcing a stock split, many uneducated retail investors and content creators started to believe that announcing a stock split would automatically make the share price jump. Therefore, with every stock split announced afterwards, these so-call “finfluencers” started telling people to buy on the premise of a stock split.

The problem is, that this is far from the truth — no stock split will make the value of a company go up in value. Here’s why.

Andrew Neel on Pexels

It’s Just An Accounting Change

The reason why doing a stock split doesn’t matter for a particular stock lies in simple math: no matter by how many shares you divide a company’s value over, at the end of the day, the company’s value doesn’t change.

The truth is, changing this number doesn’t have any intrinsic impact on the company’s value. It’s not like a cake changes in size if you slice it in 10 or twenty slices.

But for some reason, people do believe that stock splits lead to this, a rally just because it increases “accessibility” to the stock. The reasoning behind this belief is that, all of a sudden, you’ll have a lot of people buying the stock because they couldn’t afford the share beforehand. Now that poor retail investors can afford these shares because they don’t need to spend $3,000 anymore, they’ll all flock to these companies and make the shares go up.

To be fair, this does make sense on paper. But only on paper, because people are effectively blowing out of proportion how material of a change this will be. It’s not like the floodgates are going to open and all these new investors that weren’t previously buying are now going to do so.

Plus, you have to remember that we already have things like fractional shares, which let people invest as much money as they want to into companies trading for thousands of dollars per share. So people who wanted to own these companies already had methods of owning them.

This is not to say that Google’s not going to see a positive impact in July after the stock split is done. But, you know, Google is a corporation worth $1.5 trillion. Saying that such company will double in valuejust with this is like saying it’s suddenly going to become larger than Canada thanks to an arbitrary accounting change. And also, over 1.5M shares of Google are traded daily, so you’d probably need a lot of people to actually influence the price.

You Really Think The Bar Is So Low?

In February 2022, Amazon’s board announced a 20 for 1 stock split (along with a $10bn share repurchase authorisation).

Applying what many YouTubers & TikTokers are saying, a lower share price would make it more affordable — therefore increasing demand and leading to a higher share price.

But when making a quick reality check, this only applies if your target market is “retail investors who can’t afford $2500 per share but can afford $130”.

Which leads to my main point of this whole post — you really think the barrier to entry is so low in a world with fractional shares? And in the case of AMZN or GOOG, you think people with less than $2k to invest will actually move the $4–5B volume of shares traded each day? I could understand this concept when applied to Berkshire Hathaway’s A shares that trade for $500k, but not for such low amounts.

Correlation Does Not Imply Causation

Finally, let’s talk about the only piece of evidence these people have: the case of Tesla and Apple.

Those two are indeed two good examples of companies that did stock splits and then saw their stock price rally afterwards- but that’s only two companies. Plus, both these companies have also had other reasons for their value to increase, like posting two years of record breaking financial results.

On the other hand, companies like Amazon, Nvidia and GameStop have also announced stock splits over the past six months, but their stocks are actually down ever since they did. Is it maybe because there is no correlation between the two things? Just maybe.

AMZN’s jump on stock split announcement / Google Finance

As you can see from the picture above, Amazon did indeed jump on the news of a stock split. But since then it has also fallen well below where it initially was, and the stock price has not even taken place yet.

Plus, I mean, a number of examples so low you can visualize it on your fingers is not nearly enough to prove a statistical relationship.

I think I’ve made my point pretty clearly. Stock splits are an arbitrary accounting change that has little to no impact on a company’s overall value — it does not increase its earnings or cash flows, so there’s no reason to believe it will actually do anything.

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