Apple stock split: Should you buy now or wait?
New York (CNN Business)Apple has grown increasingly dominant, and its stock is soaring to new heights. The company is aiming to make it easier for more investors to get in on the action with a stock split that will lower the price on individual shares.
The split follows a huge milestone for the iPhone maker — last week, Apple's market cap surpassed $2 trillion. In the following days, that number has continued to climb to around $2.16 trillion on Monday, making Apple (AAPL) the most valuable stock in in history after passing Saudi Aramco's record $2.03 trillion market cap peak, which it reached in December.
Apple shows no signs of slowing. Its highly anticipated 5G iPhone and opportunities in emerging markets are ly just around the corner.
Apple's stock split process begins today after the closing bell. The company will make a record of current shareholders whose stocks will be split. Current investors will receive their additional shares after the closing bell on August 28, and shares will begin trading at the new, split-adjusted price on August 31.
Here's what current and potential investors need to know.
The four-for-one stock split will not change the value of any investor's total holding of Apple, it will just grow the number of shares making up that pot. So, if a potential investor has a set amount of money they want to invest in the company, it wouldn't necessarily matter if they bought before or after the split.
Here's an example: Assuming share prices don't move dramatically during the several-day split process, if an investor owns two Apple shares at $500 each before the split (a $1,000 total holding), after the split they will own eight Apple shares at $125 each (still a $1,000 total holding).
The split is expected to make a difference for smaller, individual investors who may not be able to afford a share of Apple at $500 each (currently it's cheaper to buy an iPhone SE than a share of Apple) but could afford the lower, post-split price.
As of Monday afternoon, Apple shares were trading around $505.
This is Apple's fifth stock split since going public. And previous splits have been a hit with investors.
In June 2014, following a seven-for-one stock split, Apple shares were trading at $94. Within a year, share prices had grown nearly 37% to $129.
Can Apple keep growing?
Apple is already a behemoth, but many Wall Street analysts expect it to continue its dramatic growth.
Chief among the upcoming growth drivers is the 5G iPhone, which is widely expected to launch this fall. The new technology, which will allow iPhones to connect to the next generation of super-fast wireless networks, is a big advancement that could prompt a “super cycle” of consumers upgrading their devices.
“We believe iPhone 12 represents the most significant product cycle for (Apple CEO Tim) Cook & Co. since iPhone 6 in 2014 and will be another defining chapter in the Apple growth story looking ahead,” said Dan Ives, analyst at Wedbush Securites, in an investor note earlier this month.
The improved connectivity from 5G could also lead to greater adoption and use of Apple's digital services, such as Apple Arcade and Apple TV+, which the company increasingly relies on to diversify sales.
Although expectations are high for the new releases, older and cheaper iPhones may also play an important role in Apple's future, according to Morgan Stanley analyst Katy Huberty.
The company's iPhone trade-in program provides it with used devices that can be re-sold, typically in emerging markets for a fraction of the price of new iPhones. In those markets, Huberty said, Apple holds a much smaller slice of market share than its global and developed markets positions — meaning it has significant room for growth.
Between the lower-priced iPhone SE and the forthcoming 5G iPhone, existing Apple device owners have growing incentives to upgrade old devices, growing the trade-in program.
Currently, Apple holds 8% market share in emerging markets, compared to 35% share in developing markets and 15% overall global market share. But by 2023, Huberty said she expects that around 70% of Apple consumers will participate in the trade-in program, which could boost Apple's emerging market share to 15%, and its overall global market share to 21% in that period.
That would mean a larger installed user base for Apple, and ly more consumers of its digital services and other hardware products, such as AirPods.
“Apple's used iPhone opportunity and the resulting installed base growth helps bolster the company's long-term growth profile,” Huberty wrote in an investor note last week.
So, what does all that mean for potential Apple investors?
If you can afford it now, analysts think an investment in Apple will continue to pay off.
If not, Apple shares will be cheaper in a week and you can get in on it then.
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Should You Buy Apple After Its Stock Split?
Shares of Apple (NASDAQ:AAPL) are about to become a whole lot more affordable. The company is splitting its shares 4-for-1. The stock will begin trading on this split-adjusted basis on Aug. 31.
With Apple's stock split right around the corner, many investors who didn't previously want to shell out around $500 per share may now be interested in buying the stock.
Will the tech stock be worth buying after the stock split?
Apple CEO Tim Cook. Image source: Apple.
Understand Apple's stock split
First off, it's important to note that a stock split will not, by any means, make Apple's stock more attractive.
While shares will be one-fourth of the price they were before the stock split, they will also each have one-fourth of the business ownership they had previously.
Investors, therefore, shouldn't buy Apple stock after the split on the premise that shares will be “cheaper” or because they think shares suddenly have more upside potential than they did before.
To fully grasp how Apple's upcoming stock split will work, imagine that shares of the tech giant are trading at $500 at the time of the split. Now picture an investor who owned four of these shares. The total value of the combined Apple shares before the split, therefore, would be $2,000.
After the split, the total value will still be $2,000, except it will comprise 16 total shares, since each share will be split into four. This is all a forward stock split is: a division of shares and their underlying intrinsic value. It changes nothing about the stock's long-term potential.
Even though many investors are ly aware of how stock splits work in theory, some may still be betting that a lower stock price will make higher prices more achievable over time because of psychological reasons. For instance, they may believe that more investors would be willing to pay up for a 15% gain over the next year on a $125 Apple stock than would be willing to do so on a $500 stock over the same time frame.
Investors, however, should avoid this kind of thinking because Apple's underlying business performance will ly be the primary driver for the stock.
Even if there was a psychological factor that helped drive enough demand for the stock to help it appreciate more rapidly over the next 12 months, thanks to a lower split-adjusted share price base, this irrational catalyst could easily — and quickly — be overrun by material news about Apple's business. Furthermore, investors will ly quickly become accustomed to the split-adjusted stock price and the assigned per-share business value.
The main point is this: Investors should stay focused on Apple's underlying business — not the mechanics of the tech giant's stock split — when deciding whether to buy Apple stock.
Is Apple stock a buy?
The tech company does have a lot going for it. Analysts were expecting Apple's revenue to decline during its fiscal third quarter as the company dealt with coronavirus-related challenges.
Yet revenue increased 11% year over year, and earnings per share jumped 18% over the same time frame, highlighting the incredible resilience of Apple's business.
Even more, growth was broad-based, with revenue rising in both products and services, as well as in every geographic segment.
Image source: Getty Images.
But investors should note that a recent run-up in Apple's stock price has made its valuation more difficult to justify. Apple now trades at a price-to-earnings ratio of 38 — a figure that will stay approximately the same after the stock split, assuming shares do not move meaningfully up or down between now and Monday.
If you're interested in buying Apple stock after shares begin trading on a split-adjusted basis, you should know that strong business performance is already factored into the price. Any upside to the stock in the coming years, therefore, won't ly come close to the appreciation the stock has seen during the last few years.
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