Stock Market Comment: Tech companies announce stock splits

• Tech companies announce stock splits after market rally

• Split itself does not have impact on investors' holdings

• Positive market reaction to announcements from Tesla and Apple

• Amazon and Alphabet on watch

The gargantuan rise in share price of tech companies encouraged executives to engage in corporate actions. Tesla announced a 5-for-1 stock split earlier this week while Apple has made a similar announcement at the end of July. In this short commentary we will take a closer look at what stock split and whether investors could take advantage of them.

What is a stock split?

Let's explain what a stock split is at the start. It is a type of corporate actions that splits existing shares of the company into more shares of the company at a predetermined ratio. What's important is that share price is also adjusted for this ratio, meaning that a 2-for-1 split of shares worth $20 will award each investor 2 new shares worth $10 each for every share they owned before the split. In turn, the impact of a split itself is neutral for investors as their ownership and value is preserved. There are different reasons why companies decide to carry out a stock splits but among the most popular one can find making shares more accessible to retail investors (through lower share price) and boosting liquidity of a stock (through higher share count).

Tesla (TSLA.US) surged yesterday after the company announced a 4-for-1 stock split. Share price broke above the short-term downward trendline, suggesting that ongoing correction may be over. A swing level at $1,675 is the first resistance to watch should the stock build on recent gains. Source: xStation5

Market rewards Tesla and Apple

However, while split itself does not have any impact on investors' portfolios, the market rarely ignores such announcements. Reaction to recent announcements from Apple and Tesla was far from neutral. Apple rallied over 10% on July 31 after the tech company announced a 4-for-1 stock split, effective August 31. Tesla said on Tuesday this week that it will perform a 5-for-1 stock split, which will also take effect on August 31. Share price of the US electric vehicle manufacturer surged more than 13% the next day. 

Positive reactions to stock split news may hint that the market expects new demand for shares of those companies. This would imply that some investors were left on the sidelines up to now due to their limited capital that made investment in those shares and proper diversification of portfolio mutually exclusive.

Apple (AAPL.US) shares accelerated upward move after the company announced a 5-for-1 stock split (orange circle). Gains continued until a resistance in the $450 area was reached. More upside could be looming as the company announces a new service bundle today. Session may be launched at the fresh all-time high today. Source: xStation5

Who's next in line?

However, Tesla and Apple were not the only tech shares that experienced very strong gains this year. Looking out for companies that are popular, have high nominal share price and have not performed a stock split in a long time could be a promising strategy amid sky-high tech valuations. 

There are 2 major tech companies, which have very high share prices and may take hints from Tesla or Apple moves. Those two stocks are Amazon (AMZN.US) and Alphabet (GOOGL.US). Shares of the former trade at over $3,100 while Alphabet's share price hovers near the $1,500 mark. Amazon delivered a total of 3 stock splits with the latest one being made over 20 years ago, in September 1999. Alphabet made just one stock split and it was in April 2014. Positive market reaction to stock splits announced by Tesla and Apple could be an important factor in a decision-making process. Both stocks enjoyed strong upward momentum in a pandemic environment and both trade near all-time highs. The fact that Amazon and Alphabet are popular among retail investors, just like Tesla and Apple, suggests that stock splits in their shares could see a similar positive market reaction.

Amazon (AMZN.US) has been trading in the $2,935-3,250 range recently. However, recent pullback was halted near the midpoint of the range rather than near lower limit suggesting that bulls may be regaining advantage. Very high nominal share price and positive market reaction to stock splits announced by Tesla and Apple could trigger additional demand and facilitate a break above the upper limit of the range at $3,250. Source: xStation5