Stock-Split Watch: Is This AI Stock That's Soared 300% Next on the List?

Stock splits have fascinated investors over the past few years, with even the biggest artificial intelligence (AI) names -- such as Nvidia and Amazon -- completing such operations after their stock prices skyrocketed. But one AI stock, in particular, hasn't ever launched a split, and that's Meta Platforms (NASDAQ: META).

Here's why this company, which has soared more than 300% over the past three years, could be next on the list.

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Image source: Getty Images.

How and why companies launch stock splits

Before diving in, though, let's take a closer look at how and why companies split their stocks. These operations are used to lower the price of each individual share -- so companies generally do this after their stock prices have made significant gains and have arrived at a price that may discourage some investors from buying.

For example, as stocks approach the $1,000 mark, even if valuation looks fine, they still may be viewed as expensive by certain investors. And investors who don't have access to fractional shares might find it difficult to buy a stock at these levels. These two elements could weigh on demand for the company's stock, limiting its potential for further gains.

Companies split their stock by simply offering more shares to current holders -- the number of shares depends on the ratio of the split. So, for example, in a 10-for-1 split, if you originally held one share, you would hold 10 post-split. The value of each share would be worth less than it was prior to the operation, but the total value of your holding would remain the same.

All of this means a stock split doesn't change anything fundamental about the company or the stock, but it does make it easier for a broader range of investors to buy.

Stock-split activity over the years

As mentioned, Nvidia and Amazon completed splits, along with other technology giants such as Broadcom and Alphabet. And, over time, almost every member of the "Magnificent Seven" -- a group of tech stocks that led the stock market higher last year -- has completed a stock split. The exception is social media and AI powerhouse Meta.

Like its fellow Magnificent Seven players, Meta has delivered impressive stock performance -- and actually is the second-best performer over the past three years, after AI chip giant Nvidia.

META data by YCharts

Today, Meta shares trade for more than $600, outpacing the rest of these star tech stocks -- Microsoft is the closest, with shares trading for about $470.

Though Meta actually is the second-cheapest of the bunch -- trading for only 26x forward earnings estimates -- the stock's price tag still could dissuade investors or make it difficult for some investors to access it.

META PE Ratio (Forward) data by YCharts

When Nvidia launched its split a year ago, the company said it was doing so to make it easier for employees and other investors to invest -- so companies do recognize this as an issue and use stock splits to address it. If Meta, like Nvidia, takes this view, the tech giant could decide to launch a split in the months to come.

A positive message from management

A split also is a great idea at this point in Meta's story because it offers investors a positive message after a difficult first half for the tech industry. When a company splits the stock, bringing it down to a lower level, the move implies the company is confident about its prospects -- and believes the stock could soar once again.

Finally, now is a good time to announce this sort of operation, because Meta could benefit from a more positive environment for AI stocks ahead. Earlier this year, investors worried about a slowdown in AI investment, but this didn't happen, and interest in AI remains high. The soaring demand seen by AI chip providers such as Nvidia and Advanced Micro Devices illustrates this.

Against this backdrop, investors may flock to companies heavily involved in AI, and this movement may lead Nvidia higher. Meta is known for its social media apps, led by the flagship Facebook, but the company also has developed its own large language model, Llama, and is using it to power features across its apps. This is key because the more time we spend on these apps, the more advertisers will see this as the ideal spot to reach us -- and advertising brings in most of Meta's revenue.

All this means that a stock split could be very beneficial for both investors and for Meta -- and that's why this company may be next on the list to carry out such an operation.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.