Artificial intelligence (AI) has emerged as the stock market's biggest trend over the last couple of years. As is the case with many other game-changing opportunities, some stocks have produced outsized gains.
Sometimes, investors will back away from stocks that have witnessed rapid price appreciation in a relatively short time frame. One reason for this is the stock is perceived as too expensive given its new price tag. If share climb high enough, a company's management team may opt for a stock split in an effort to spur new buying activity.
After a 1,870% increase in its share price over just two years, Super Micro Computer (SMCI -5.15%) announced a 10-for-1 stock split in early August that is due to occur on Oct. 1.
With the split just days away, is this a lucrative opportunity to scoop up shares of the AI darling?
A trip down memory lane
During a stock split, a company will issue more shares, thereby causing the stock price to drop. The important caveat here is the outstanding share count and stock price should have an inverse relationship, therefore leaving the overall valuation of the company the same as before the split.
Two higher-profile stock splits this year have come from chip giants Nvidia and Broadcom. Let's take a look at how trading activity has played out following each company's split.
1. Analyzing Nvidia's stock split
The chart below illustrates the return for Nvidia stock from the day its own 10-for-1 split was announced on May 22 through market close on Sept. 20. The day shares began trading on a split-adjusted basis (June 10) is annotated in the purple circle marked with the letter "S".
Data by YCharts.
Although shares have risen 22% since the day the split was announced, there are underlying trends illustrated in the chart above that are important to call out. For starters, Nvidia stock witnessed a sharp rise in the days leading up to the split. Although this buying continued for a brief period following the split, the euphoria appears to have been short-lived.
Throughout July and parts of August, shares of Nvidia cratered to levels more in line with pre-split valuations. This means investors who bought Nvidia stock around the time of the split actually bought in at a higher valuation compared to before the split, despite the appearance of a lower-dollar stock price.
Here's the real kicker: Since shares of Nvidia started trading on a split-adjusted basis on June 10, the stock is down 5% as of market close on Sept. 20.
2. Analyzing Broadcom's stock split
Broadcom announced a 10-for-1 stock split on June 12 as part of its fiscal 2024 second-quarter earnings results. Shares of Broadcom began trading on a split-adjusted basis on July 15.
Data by YCharts.
Shortly following the announcement of the split in June, shares of Broadcom spiked -- just as they did with Nvidia. Moreover, as with Nvidia, Broadcom's stock price experienced heavy selling activity shortly following the execution of the split in July.
Since shares started trading on a split-adjusted basis on July 15, Broadcom has traded flat as of the Sept. 20 market close.
Image Source: Getty Images
An important takeaway regarding stock splits
You may be wondering why both Nvidia and Broadcom stock experienced such similar trading patterns around the time of their respective splits.
One influence behind the volatility is likely due to momentum trading. Day traders often take advantage of momentum in hopes of booking a quick profit. One problem here is that less sophisticated investors may follow this activity but end up holding the bag after traders have dumped their position.
But there were a number of macro-level factors that played a role in the ups and downs for both stocks too, which explains why the Nasdaq Composite exhibited similar trends over the same period.
Data by YCharts.
Much of this selling was due to shifting investor sentiment around AI with some analysts beginning to sound the alarm on stocks that may have climbed too high, too quickly. Moreover, this volatility carried over into September as investors waited anxiously for the Federal Reserve's decision to begin cutting interest rates.
Is Supermicro stock a buy before its upcoming split?
Just like Nvidia and Broadcom, shares of Supermicro stock surged following the announcement of its split in early August. However, you'll notice the stock has fallen nearly 26% since its announcement.
Data by YCharts.
Supermicro's ongoing sell-off likely stems from the combination of a mixed earnings report as well as a short report from Hindenburg Research. Heavy capital expenditures are having a noticeable impact on the company's gross margin, leading to concerns about liquidity and long-term profit potential. Management has described the margin deterioration as a short-term issue related to a new product rollout and supply chain issues.
While the sell-off has normalized Supermicro's valuation a bit, I'm torn on whether or not it's a good buying opportunity at the moment.
The prudent thing to do is sit on the sidelines and wait until after shares begin trading on a split-adjusted basis on Oct. 1. As time goes on, investors should get a clearer picture regarding the short report's allegations, all while observing how the market reacts following the execution of the split.
