The big day has arrived for Super Micro Computer (NASDAQ: SMCI). The technology company’s stock split happens after the market close, and the shares will begin trading tomorrow at their new — and significantly lower — price. Supermicro joins the list of other high-flying artificial intelligence (AI) stocks — such as Nvidia and Broadcom — that have completed such operations in recent months.
These market giants have launched splits in order to make their shares more accessible to a broader range of investors. Supermicro shares have soared in recent years as the AI boom accelerated, helping revenue to climb in the triple digits. AI customers have rushed to Supermicro for its servers, workstations, and other products that it tailors to suit their data centers. As Supermicro shares climbed 188% in the first half, even surpassing gains of Nvidia and reaching beyond the $1,000 mark, investors speculated that a stock split may be next on the agenda. And Supermicro went on to announce a stock split when it reported quarterly earnings in August.
But unlike peers Nvidia and Broadcom, Supemicro shares haven’t climbed following the decision. That’s as other news in recent weeks weighed on the stock: Hindenburg Research published a short report alleging troubles at the company, and separately, Supermicro delayed the filing of its 10-K annual report. Finally, just last week, The Wall Street Journal reported that the Justice Department may have launched a probe into the company following the short report. All of this has left Supermicro shares down nearly 30% since Hindenburg’s publication in late August.
Today, though, Supermicro’s stock split is unfolding, and it’s a great time to take a closer look at the company. Here’s what you need to know.
Why companies launch stock splits
First, a bit of background on stock splits. As mentioned, these operations lower the per-share price of a stock to make it easier for more people to buy — and this is done by issuing additional shares to current holders. The move doesn’t change anything fundamental about a company, so valuation and market value remain the same. Though the per-share price declines, stock splits don’t make the shares any cheaper.
This also means a stock split, on its own, isn’t a reason to buy a particular stock and won’t act as a catalyst to drive the price higher. A stock split could be seen as a positive move for a company, though, since it may drive 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 climb from its new lower price.
Now, let’s move on to the Supermicro operation. Supermicro is launching a 10-for-1 stock split, which means holders of one share will receive nine additional shares after the market close today.
The total value of the holding won’t change, though each share will be worth a tenth of its original value. So, using the current level of Supermicro stock as a guide, the value of one share should decline from about $400 to $40. And this means Supermicro stock will open at the new split-adjusted price of around $40 tomorrow, Oct. 1.
If you’re a Supermicro shareholder, you don’t have to do a thing. All of this will happen automatically, and the extra shares will appear in your brokerage account. If you’re not yet a Supermicro shareholder, you may be wondering what happens if you buy the stock today, right before the split. You, too, will receive the extra shares since the right to them transfers over from the seller. Finally, if you wait until tomorrow to buy the stock, you’ll get it at the split-adjusted price.
Should you buy Supermicro?
Is it a better idea to buy now or wait until after the split? It’s true the split will make it easier for you to buy Supermicro if you want to invest less than the current $400 share price. With $100, for example, you can easily pick up a couple of shares post-split. So, if this is your situation, for convenience, you may want to wait until after the split.
But aside from that particular scenario, it really doesn’t matter if you buy the stock before or after the operation — because, as I talked about above, this move only alters the per-share price.
Now let’s answer one more question: Considering the news I mentioned above, should you really buy Supermicro shares? It’s true that Supermicro is looking particularly cheap right now, trading at only 11x forward earnings estimates. Very aggressive investors may consider picking up a few shares at these levels.
It’s important to remember that Hindenburg Research holds a short position in Supermicro, meaning the firm benefits from a decline in the stock price. In short selling, investors borrow shares of a company, sell them, then purchase them once again — ideally at a lower price — to return to the original owner. This means Hindenburg has a bias, making it difficult to rely on the firm as a source of information. Meanwhile, a Justice Department probe hasn’t been confirmed — and if a probe is confirmed at some point, this doesn’t imply wrongdoing.
Earlier this month, Supermicro responded to concerns about the Hindenburg report and its own delayed annual report filing. The company called Hidenburg’s statements “false or inaccurate” and pledged to address them in “due course.” Supermicro also said it didn’t expect the delayed filing of its annual report to result in major changes to its earnings report. The company declined to comment on the Justice Department probe report, The Wall Street Journal said.
So from the information we have today, Supermicro’s story still looks solid, and considering the company’s leadership in the market and the demand from AI customers, its long-term prospects remain bright.
That said, uncertainty remains, and even post-split, the stock may remain volatile. For most investors, it’s a good idea to wait to buy until Supermicro fully addresses statements in the Hindenburg report or offers further clarifications. There’s reason to be optimistic about this company over the long term, but it’s best to gather all of the facts before making any moves — to buy or sell.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in 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
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