The big day has arrived for super microcomputer (NASDAQ:SMCI). The tech company’s stock split comes after the market closes, and the stock will begin trading tomorrow at its new, and significantly lower, price. Supermicro joins the list of other high-flying artificial intelligence (AI) stocks such as NVIDIA and Broadcom — who have completed such operations in recent months.
These market giants have launched splits to make their stocks more accessible to a wider range of investors. Supermicro shares have soared in recent years as the AI boom accelerated, helping revenue rise by triple digits. AI customers have been quick to turn to Supermicro for servers, workstations and other products it fits into their data centers. As Supermicro shares rose 188% in the first half, outpacing even Nvidia’s earnings and surpassing the $1,000 mark, investors speculated that a stock split could be next on the agenda. And Supermicro announced a stock split when it reported its quarterly earnings in August.
But unlike peers Nvidia and Broadcom, Supemicro shares have not risen following the decision. That’s because other news in recent weeks weighed on the stock: Hindenburg Research published a brief report alleging trouble at the company, and, separately, Supermicro delayed filing its annual 10-K report. Finally, just last week, The Wall Street Journal reported that the Department of Justice may have launched an investigation into the company following the brief report. All of this has caused Supermicro shares to drop almost 30% since Hindenburg’s publication in late August.
Today, however, Supermicro’s stock split is developing and it’s a good time to take a closer look at the company. Here’s what you need to know.
Why companies launch stock splits
First, a little history on stock splits. As mentioned, these trades reduce the per share price of a stock to make it easier for more people to buy, and this is achieved by issuing additional shares to current holders. The move does not change anything fundamental about a company, so the valuation and market value remain the same. Although the price per share decreases, stock splits do not make the stock cheaper.
This also means that a stock split, by itself, is not a reason to buy a particular stock and will not act as a catalyst to drive the price up. However, a stock split could be seen as a positive move for a company as it can attract more investors to the stock over time. And it suggests that the company’s management is optimistic about the future, with the idea that the stock has what it takes to rally from its new lower price.
Now let’s move on to the Supermicro operation. Supermicro is launching a 10-for-1 stock split, meaning holders of one share will receive an additional nine shares after the market closes today.
The total value of the share will not change, although each share will be worth one tenth of its original value. So, using Supermicro’s current share level as a guide, the value of one share should decline from about $400 to $40. And this means that Supermicro shares will open at the new split adjusted price of around $40 tomorrow, October 1st.
If you are a Supermicro shareholder, you don’t have to do anything. This will all happen automatically and the additional stocks will appear in your brokerage account. If you’re not already a Supermicro shareholder, you might be wondering what happens if you buy the stock today, just before the split. You will also receive the additional shares, since the right to them is transferred from the seller. Finally, if you wait until tomorrow to buy the shares, you will get them at the split adjusted price.
Should you buy Supermicro?
Is it better to buy now or wait until after the split? Admittedly, the split will make it easier for you to buy Supermicro if you want to invest less than the current share price of $400. With $100, for example, you can easily purchase a couple of shares after the split. So if this is your situation, for convenience’s sake, you may want to wait until after the split.
But other than that particular scenario, it doesn’t really matter if you buy the stock before or after the trade, because, as I mentioned above, this move only alters the price per share.
Now let’s answer one more question: Considering the news I mentioned above, should you really buy Supermicro stock? Admittedly, Supermicro looks particularly cheap right now, trading at just 11 times forward earnings estimates. Very aggressive investors may consider purchasing some stocks at these levels.
It’s important to remember that Hindenburg Research maintains a short position in Supermicro, meaning the company benefits from a drop in the share price. In short selling, investors borrow shares of a company, sell them, and then buy them again (ideally at a lower price) to return them to the original owner. This means Hindenburg has a bias, making it difficult to trust the company as a source of information. Meanwhile, a Justice Department investigation has not been confirmed, and if an investigation is confirmed at some point, this does not imply wrongdoing.
Earlier this month, Supermicro responded to concerns about the Hindenburg report and its own delay in submitting the annual report. The company called Hidenburg’s statements “false or inaccurate” and promised to address them “in due course.” Supermicro also said it did not expect the delay in filing its annual report to result in any material changes to its earnings report. The company declined to comment on the Justice Department investigation report. The Wall Street Journal saying.
So based on the information we have today, Supermicro’s story still looks strong, and considering the company’s market leadership and customer demand for AI, its long-term prospects remain bright.
That said, uncertainty remains and even after the split, the stock may remain volatile. For most investors, it is a good idea to wait to buy until Supermicro fully addresses the Hindenburg report’s statements or offers further clarification. There are reasons to be optimistic about this company in the long term, but it is best to gather all the facts before taking any action: buy or sell.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Super Micro Computer’s 10-for-1 stock split is happening today. Here’s what you need to know. was originally published by The Motley Fool