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IT Infrastructure Company supercomputer (NASDAQ: SMCI) It was a favorite among artificial intelligence (Artificial Intelligence) over the past year.
Earlier this month, Supermicro announced its financial results for the fourth quarter and full fiscal year 2024 (ending June 30).The earnings report was a mix of results.But management surprised investors by announcing a 10-to-1 stock split.
Let's explore how stock splits work and examples of recent stock splits from similar AI companies to help shape a comprehensive investment thesis about Supermicro at this time.
1. How does the stock split process work?
A stock split is simply a financial engineering mechanism.
When a company executes a split, its outstanding shares rise by the same number in the split ratio (in the case of Supermicro, its number of shares will multiply by 10 after the split, at a ratio of 10 to 1). Conversely, the company's stock price should subsequently fall by the same factor.
For this reason, stock splits do not necessarily change a company’s market value or valuation. However, as I will explain in detail below, news of splits often attracts significant attention, which can lead to abnormal volatility in the trading of the stock in question.
2. Why? Supermicro Split its shares?
Artificial intelligence has been the talk of the tech industry for the past year and a half or so. Supermicro's close relationship with favorite semiconductor companies Nvidia and Advance Micro Devices Inc. It helped propel its business to a new level and cemented it as an emerging growth opportunity for AI enthusiasts. Since January 2023, shares are up 652% as of this writing.
One of the main reasons the company is splitting its stock is to make it more accessible. With the stock price above $615, many investors are likely to see Supermicro as overpriced. If a 10-for-1 split occurred today, the stock price would drop to around $62.
Again, while you would technically be buying Supermicro shares at the same valuation, investors may see the stock as less expensive and be more inclined to buy.
3. How is a stock split handled?
Brokerage firms such as Vanguard or Fidelity or Charles Schwab Dealing with mechanics in the background.
Let's say you already own 10 shares of Supermicro at $500 per share. After the split on October 1, your brokerage account will automatically reflect your position as having purchased 100 shares at $50 per share.
It requires no work on your part.
4. Has Supermicro ever split its stock?
Supermicro's 10-for-1 stock split marks the first time the company has split its stock.
5. Should you buy Supermicro stock before or after the split?
As I mentioned earlier, split stocks can get a lot of attention, which can impact stock price dynamics.
For example, excessive momentum may affect a stock at the time of its split. As day traders flock to the stock, the stock price begins to rise very quickly.
This activity could lead to a significant valuation expansion in a short period of time, making the stock a risky buy. I would encourage investors to be patient until the traders take out the momentum and make their quick profits. The last thing you want to do is buy a stock at a high valuation and then find yourself in an awkward position when traders suddenly sell.
The chart 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, and Nvidia announced its on May 22.
Investors can see that shortly after these announcements were made, both Broadcom and Nvidia saw temporary tremors in their stock prices.
However, both stocks have decreased Following the implementation of their own divisions.
As a caveat, I don’t recommend looking for the perfect moment to buy Supermicro shares. However, recent examples highlight how buying too close to the split date can lead to higher than normal volatility.
A wiser strategy might be to wait until the split occurs and watch how the price action develops. If there is a sell-off immediately after the split, you may be able to buy at a more reasonable price.
Should you invest $1000 in Super Micro Computer now?
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Adam Spatako The Motley Fool has positions in Nvidia. The Motley Fool has positions in Advanced Micro Devices, Charles Schwab, and Nvidia and recommends them. The Motley Fool has positions in Broadcom and recommends the following options: Short-term $77.50 September 2024 calls on Charles Schwab. The Motley Fool has Disclosure Policy.
Here are 5 things smart investors should know about Super Micro Computer's 10-for-1 stock split. Originally posted by The Motley Fool
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