Is Microsoft Stock Split Ahead? Watch Now!

Tech giant Microsoft (MSFT -0.29%) has been a staple in the stock market for decades and is no stranger to stock splits, having split its stock nine times from the late 1980s to the early 2000s. However, the company hasn't split its stock since then. Currently, Microsoft shares are trading at over $400 each, driven by growth in cloud computing and artificial intelligence (AI), which could continue to fuel the stock's upward trajectory for the long term. This raises the question: is it time for Microsoft to consider another stock split?

What Does a Stock Split Mean for Investors?

Stock splits often garner significant media attention, but are they truly impactful for investors? A stock split occurs when a company divides its existing shares to increase the total number of shares. For instance, if a company's stock is priced at $100 per share and undergoes a 5-to-1 split, each share would then trade at $20, resulting in five shares for every original share. Importantly, the overall value of the investment remains unchanged; one share at $100 is equivalent to five shares at $20 each.

Stock splits merely divide the company's revenue, profits, and equity among more shares, which means the fundamental valuation of the company remains the same. So why do companies opt for stock splits? Primarily for liquidity. As the price per share increases, it becomes harder for investors to buy shares without a substantial amount of money. Employees with stock-based compensation might also prefer not to sell at high dollar amounts. More shares at a lower price make it easier for both investors and employees to buy or sell smaller amounts at a time.

Why a Stock Split Makes Sense for Microsoft?

Microsoft's history of stock splits from the late 1980s to the early 2000s was driven by impressive stock performance, with the company’s stock appreciating nearly 60,000% from 1986 to 2000, before the Dot-Com crash. The crash significantly impacted Microsoft's stock, which took 17 years to recover to its pre-crash levels. This long recovery period is why Microsoft has only split its stock once since 2000.

The launch of Microsoft's cloud platform, Azure, in early 2010 marked a new era for the company. Since then, Microsoft's stock has appreciated by 1,400%, with Azure becoming the company's largest and fastest-growing business unit. A new generation of Microsoft employees likely holds significant stock gains.

Azure is now the world's second-leading cloud platform, and Microsoft's partnership with OpenAI positions it well to capitalize on the growing adoption of AI. These factors suggest that a stock split could be beneficial, making it easier for new investors and employees to participate in the stock’s growth.

Is Microsoft a Buy?

Microsoft's recent fourth-quarter earnings for fiscal year 2024 exceeded Wall Street expectations, driven by strong performance in its cloud and gaming sectors. Currently, Microsoft trades at 32 times its estimated 2025 earnings, with analysts projecting an annualized earnings growth rate of 16% over the next three to five years.

While stock splits do not fundamentally change the value of the stock, they can make it more accessible to a broader range of investors. Microsoft's current price-to-earnings ratio is double its earnings growth percentage, which might seem expensive. However, the company's unique combination of quality and growth potential might justify the premium for long-term investors, though market volatility could offer better buying opportunities in the future.

Conclusion

Considering Microsoft's significant growth in the cloud and AI sectors, alongside its strong financial performance, a stock split could enhance liquidity and make the stock more accessible to a wider range of investors. While a stock split alone isn't a reason to buy, Microsoft's robust fundamentals and growth prospects make it an attractive option for long-term investors willing to pay a premium. However, potential investors should remain mindful of market conditions to optimize their entry points.

Are there any other stocks that are expected to announce a stock split in the future? Discover Intellectia.AI's predictions!