Are Stock Splits Bullish?

Rick Welch |

Stock splits come in two forms: forward and reverse. A forward-stock split (the more common of the two) is defined as “a corporate action or event which increases the number of a company’s outstanding shares, while reducing the per share price, such that the market capitalization remains the same before and after the event.” Market capitalization or market cap is calculated by multiplying the total number of shares outstanding by the price per share. To illustrate let’s look at the much anticipated, recently completed 10 for 1 split of NVIDIA Corporation (NVDA). Before the May announcement, NVDA had 2.46 billion shares outstanding which were trading at $1,200 per share giving a market cap of $2.95 trillion.  After the NVDA split, we saw 24.6 billion shares outstanding with a share price of $120 also resulting in a market cap of $2.95 trillion.   


If stock splits have no tangible impact on market cap, can they still provide bullish signals to investors?  Yes, they can. Most forward stock splits are approved to create more shares at affordable prices and spur investor demand, both objectives which are rooted in the widely held belief that share prices between $20 and $50 are most desirable for retail investors.  Lower share prices have often resulted in renewed or new investor interest and allowed companies to broaden their base of ownership. A company often decides on a split when the stock price is quite high (like NVDA at $1,200/share), making it expensive for investors to acquire a standard lot of 100 shares. By lowering the cost of the standard stock option contract, options in a stock (post-split) become more accessible.  An increased access to options provides broader liquidity and more investment opportunities – both of which are positive for the investor. 


Most stock splits are seen as a bullish message from management that the outlook for continued growth and profitability is quite strong.  This vote of confidence from management is an important statement and reminds us that over the long term, a company’s value is determined by its earnings, not its stock price.  History shows us that stocks that split usually do better than the S&P 500 in average 12-month total returns after the announcement of the split. According to a study by Bank of America Global Research, since 1980 companies that have split their stocks have reported average 12-month returns (post-split announcement) of +25.4% versus +11.9% for the S&P 500.  In the short term, some high-profile splits (like NVDA) will see increased stock price volatility resulting from speculative buying and profit taking around the event. After the short-term pop in investor interest, new normal trading patterns will emerge. Nonetheless, after the initial excitement of the news wanes, stock splits by blue-chip companies are viewed as a bullish signal by investors.  As a member of the magnificent 7 (along with Alphabet, Amazon, Apple, Meta, Microsoft and Tesla) what type of share price performance should we expect to see from a post-split NVDA?  Not sure, however, we can look at recent average 12-month returns (post-split) for Amazon (+1.45%), Apple (+18.41%), Alphabet (+13.54%) and Tesla (-19.41%) to give us an idea.


If a forward split suggests strength and promise, most reverse splits suggest the opposite. A reverse stock split decreases the number of outstanding shares and increases the share price proportionately. As with a forward stock split, the market value of the company after a reverse split is unchanged.  A reverse split may be deemed necessary when a company’s share price falls so low that the stock risks being delisted from an exchange due to not meeting the minimum price required for listing. Some mutual funds will not invest in stocks below a preset minimum price.