Shares of Call (NASDAQ: AAPL) are about to become a whole lot more affordable. The company shares its shares 4-for-1. The stock will trade on this split-adjusted basis on August 31st.
With Apple’s stock splitting around the corner, many investors who previously did not want to spend around $ 500 per share may now be interested in buying the stock.
Will the technical stock be worth buying after the stock split?
Apple CEO Tim Cook. Image Source: Apple.
Understand Apple’s stock split
First of all, it is important to note that a share split, in no way, makes Apple’s stock more attractive. While shares will be a quarter of the price they were before the stock split, they will also each have a quarter of the corporate property they previously owned. Investors should therefore not buy Apple shares after the split with the premise that shares will be “cheaper”, or because they think shares will suddenly have more upside than before.
To fully understand how Apple’s upcoming stock split will work, imagine that the tech giant’s shares were trading at $ 500 at the time of the split. Now imagine an investor holding four of those shares. The total value of the combined Apple shares before the split would therefore be $ 2,000. After the split, the total value will still be $ 2,000, except that it will include 16 total shares, as each share will be divided into four. This is all a forward stock split: a distribution of stocks and their underlying intrinsic value. It does not change anything about the long-term potential of the stock.
Prevent speculation
Even though many investors are probably aware of how stock splits work in theory, some can still bet that a lower stock price will make higher prices more affordable over time due to psychological reasons. For example, they may believe that more investors are willing to pay 15% profit on a $ 125 Apple stock next year than they would like on a $ 500 stock over the same time frame.
Investors should avoid this kind of thinking, however, because Apple’s underlying business performance is likely to be the primary driver for the stock. Even if there was a psychological factor that helped stimulate enough demand for the stock to appreciate rapidly over the next 12 months, due to a lower split-adjusted stock price base, this irrational catalyst could easily – and quickly – be overtaken by material news about Apple’s company. Furthermore, investors are likely to soon become accustomed to the split-adjusted share price and the assigned business value per share.
The bottom line is this: Investors need to stay focused on Apple’s underlying business – not the tech giant’s split mechanics – when deciding whether to buy Apple shares.
Is Apple stock a buy?
The tech company has a lot going for it. Analysts expected that Apple’s revenue would decline in the fiscal third quarter as the company faced coronavirus-related challenges. However, revenue increased 11% year-over-year, and earnings per share jumped 18% over the same time frame, highlighting Apple’s unbelievable resistance. In fact, growth was broadly based, with revenues rising in both products and services, as in each geographic segment.
Image Source: Getty Images.
But investors should note that a recent rise in Apple’s share price has made the valuation more difficult to justify. Apple is now trading at a price-to-earnings ratio of 38 – a figure that remains roughly the same after the stock split, assuming shares do not go up or down significantly between now and Monday.
If you are interested in buying Apple shares after stocks start trading on a split-adjusted basis, you should know that strong business performance is already included in the price. Any rise to the stock in the coming years is therefore unlikely to come close to the appreciation the stock has seen in recent years.
