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Apple Shares Are Playing a Dangerous Pre-Split Game

Last Updated September 23, 2020 2:10 PM
Andrew Packer
Last Updated September 23, 2020 2:10 PM
  • Apple announced a 4-for-1 stock split last week.
  • Shares have since surged to new all-time highs.
  • Retail traders looking to invest at the lower price will be sorely disappointed.

Consumer tech giant Apple (NASDAQ: APPL) knows how to keep shareholders happy. During last week’s earnings call, the company announced it was doing a 4-for-1 stock split . That will allow retail traders to continue trading shares even as the company’s valuation hits an all-time high.

The Math Behind Stock Splits

When a company splits up its shares, all it’s doing is creating more stocks at a lower price. In the case of Apple, which now trades for about $440 per share following a post-announcement rally of 10%, the split will mean one old stock becomes four new shares at about $110 each.

Apple 1 Year Returns
AAPL has gone parabolic in the past week on the announcement of a stock split. | Source: Yahoo Finance 

Like cutting a pizza into more slices, it doesn’t change the size of the overall pie . A lower price makes it far easier for retail investors to trade shares. The keyword there is trade, not own. A great company is nearly always accessible for those willing to buy and hold stocks, even if an investor can only afford a single share.

A lower price only makes trading more accessible, particularly in an age where traders are gravitating towards options. As options contracts are standardized at 100 shares, current Apple options traders are moving around $44,000 worth of stocks with each trade. The stock split means that an options trade will be closer to $11,000, far easier for retail traders to manage.

Retail Traders Are Getting Suckered In

The issue of the stock split problem is that it sounds good on paper. As Apple’s CFO Luca Maestri stated on the company conference call,

[Apple wants] to make our stock more accessible to a broader base of investors.

Former hedge fund manager Jim Cramer agrees with the stock split. After speaking with Apple CEO Tim Cook, Cramer opined ,

I think Apple is taking the right move…. The idea that he wants more people in his stock is refreshing… Apple cares about the little guy.

While the intent of a stock split may be to increase the number of shareholders, in today’s age of zero-trading fees, an investor can buy a single share and get exposure. They don’t need a “round lot” of 100 shares.

The only reason to lower the price is to make it easier to trade, not own. A lower price may impact the Dow, which weights its holdings based on price. So, Apple shareholders won’t be the only ones affected and ultimately disappointed by this move.

Apple has been a tremendous investment over the years, and its third-quarter results during the midst of a pandemic were excellent, with an 11% increase in revenue . However, the company’s profit margin has been flat over the past seven years.

Apple Gross Margins
Apple’s gross profit margins have flatlined in recent years, a big change from the early 2000s when it was creating new products like the iPhone and iPod. | Source: Statista.com 

Making shares easier to trade at a record-high valuation will only increase volatility and the chances of smaller investors getting burned. Feeding the retail trading frenzy right now will only lead to bigger swings in shares.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds an investment position in Apple.