Stock Split Watch: Is Moderna Next?

Moderna (NASDAQ:MRNA) stock, after a few years in the doldrums, has accomplished a major turnaround. The biotech company saw its stock soar in early pandemic days thanks to the development and commercialization of its coronavirus vaccine. It went on to become a blockbuster product. But when demand for the vaccine slipped later in the health crisis, Moderna's earnings and stock performance suffered.

The biotech quickly took charge of the situation, cutting costs where needed and putting a focus on oncology and rare disease candidates. All of these efforts have started to brighten Moderna's earnings reports, and investors have sat up and taken notice.

The stock has soared 650% this year, largely outperforming many tech giants, the stocks that have driven positive market performance in recent years. Moderna stock still may be far from its record high, but it is trading 60% above analysts' estimates. At today's levels, is Moderna ripe for a stock split? Let's find out.

Image source: Getty Images.

Why do a stock split?

First, we'll zoom in on the subject of stock splits and consider why companies decide on such moves. A stock split involves offering current shareholders additional shares, and this is done in accordance with the ratio of the split. So, in a 10-for-1 stock split, a holder of one share prior to the operation would hold 10 shares afterward. The value of the holding remains the same; so, if the stock price were $1,000 prior to the operation, it would be $100 post-split, and the shareholder in my example still would have a holding worth $1,000.

These operations don't change anything fundamental, meaning the company's valuation remains exactly the same. So if a stock is seen as expensive according to its price-to-earnings ratio before the split, it will remain expensive after too.

Why do companies opt for stock splits? Often, they make such a decision after a period of gains that has left the stock trading at high levels. The definition of "high" can vary greatly depending on the company and the levels reached in the past. For example, one company may choose to do a stock split if its shares reach a few hundred dollars, while another may do so when its stock reaches beyond $1,000. It's important to note that many make the decision when a stock trades around the $1,000 level, as it may represent a psychological hurdle for investors; they might see a stock trading at this amount as pricey even if its valuation is low.

Lowering a stock price

The advantage of a stock split is that it mechanically lowers the price of each share, making the stock more accessible for a greater number of investors. Some retail investors, for example, don't have the investing budget to pay $1,000 for one stock -- but at a lower price point, they would be eager to get in on that particular company.

That said, a stock split isn't a catalyst for stock performance, so on its own, it doesn’t make a company a good or bad investment. It's purely mechanical and at most will make it easier for more investors to buy a particular stock.

Now, let's get back to Moderna. Could a stock split be on the horizon? The biotech hasn't yet done a split, so past behavior doesn't offer us any particular clues. Moderna stock has indeed skyrocketed this year -- but it isn't anywhere near the record high it reached in early pandemic days.

So management might say that, in spite of the gain this year, Moderna remains at levels that make it accessible -- and from here it could roar higher as it did in the past.

Meanwhile, investors are excited about Moderna's personalized cancer vaccine candidate, one that delivered excellent results in a phase 3 melanoma trial, and a regulatory submission may be next. At the same time, this candidate is involved in about nine additional trials in other cancer types. Trial data and regulatory news represent potential upcoming catalysts for stock performance.

All of this suggests that Moderna may not opt for a stock split just yet. At today's level, a number of investors might find it accessible and attractive as they look at the long-term growth opportunity.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moderna. The Motley Fool has a disclosure policy.