Stock-Split Watch: Is Rigetti Computing Next?

Stock splits can be confusing for investors because they change a company's stock price and outstanding share count. If an investor had missed a company's announcement regarding a stock split, they may wake up one day to find a huge change in the share price, believing something big is impacting the stock. But the key thing to remember is that stock splits do not change the overall value of a company, nor do they change an investor's equity position.

Rigetti Computing (NASDAQ: RGTI) has been one of the hottest quantum computing stocks in recent years, a sector that some investors believe could be a game-changer. Could a stock split be in store for Rigetti Computing? Let's take a look.

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Why do companies conduct stock splits?

Companies can initiate forward stock splits or reverse stock splits, which, as mentioned, alter a company's stock price and outstanding share count, either increasing or decreasing them.

For example, let's say an investor owned 400 shares of a stock trading at $1,000 per share for a total equity position of $400,000. Then that company announced a 4-for-1 stock split. In this transaction, the company would exchange four new shares for every outstanding share owned by the shareholders. The outstanding share count would quadruple, and this investor would now have 1,600 shares. Remember, though, that the company's overall value, or market cap, as well as the shareholder's equity position, would not change. The share price would decrease to $250 per share, and the shareholder would own 1,600 shares, but the total equity position would remain $400,000.

The most common reason to conduct a forward split is to make full shares feel more attainable for retail investors, so you'll often see companies do these after a stock has been on a nice run. A company may also conduct a split to boost liquidity by increasing the number of shares outstanding.

Reverse splits do the opposite by increasing a share price and lowering the outstanding share count. A company may conduct one of these if other companies in its peer group all trade at higher stock prices, to make the stock seem more comparable.

However, the most common reason for a reverse split is if a company's stock has struggled. Both the New York Stock Exchange and the Nasdaq Composite will send a deficiency notice to companies whose stocks trade below $1 per share for 30 consecutive trading days. If the company doesn't correct the situation, it could potentially get delisted.

A reverse stock split can be an easy, albeit temporary, solution for a company that believes it can turn things around and wants to remain listed on the NYSE or Nasdaq, which are the most liquid stock exchanges in the world.

Is Rigetti on stock-split watch?

Rigetti is part of a small group of pure-play quantum computing stocks that have seen their share prices surge in recent years. For instance, the stock has risen about 3,200% since the start of October 2024, although it has also been quite volatile during this period.

Quantum computers potentially represent the next iteration of traditional computers, currently found in almost every household and business in the U.S. Many researchers expect them to be more powerful than even the most advanced supercomputers available today.

Unlike regular computers, which are built on the foundation of bits, the most basic unit of digital information, quantum computers are built on qubits. Qubits are in a state of superposition and can therefore process more data and search for multiple solutions to a problem simultaneously, making their capabilities significantly more advanced than those of a standard computer, which searches for answers sequentially.

In July, Rigetti announced that it had achieved a 99.5% median 2-qubit gate fidelity on its 36-qubit system, a very high level of accuracy in the industry thus far. The company also stated that it is on track to develop a qubit system comprising at least 100 qubits. In gate-based quantum computing, the more qubits in a quantum system, the more powerful the processing power.

Although Rigetti's stock has soared in recent years, it trades at about $25 per share, as of this writing, which still feels quite attainable for retail investors. Furthermore, the stock is in compliance with the Nasdaq, and most of its outstanding shares are already publicly traded.

Rigetti currently trades at a very rich multiple, primarily because investors are betting that the company will one day be among the first quantum companies to achieve commercialization. If that doesn't happen, then the stock could take a big hit. However, it would still have to fall by a substantial amount before any kind of reverse split would be necessary, so I do not anticipate any kind of stock split in Rigetti's foreseeable future.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.