Source: PaxForex Premium Analytics Portal, Fundamental Insight
Last week Apple (NASDAQ: AAPL) made an unexpected announcement along with the third-quarter results - the tech giant will execute a 4-for-1 stock split.
The split will start on August 24, and on August 31 trading will resume at new prices.
The ratio of 4-for-1 means that an investor for 1 share will receive another 3. A decrease in the price will make the shares more accessible for small investors. The upcoming split of Apple shares will be the fifth one since the stock debut. The technology company divided its shares into two in 1987, 2000, and 2005. Then, in 2014, it will split its shares 7-for-1. In 2020, it will split its shares by 4-for-1.
This is an important moment for traders. In the end, more investors will be able to buy Apple shares, which will make them more liquid because they can be bought and sold at a lower price.
While Apple stocks may be attractive today, it is certainly not because of the upcoming stock split.
While at first glance it might seem that Apple shares could be bought because of the planned split, it makes no sense if we look at it more closely. For example, even if there is increased demand for shares due to their lower price after the split, other investors may benefit from the irrational movement in the share price and sell their shares as soon as new demand emerges.
Moreover, no one knows what news may happen on a given day. Nobody knows how Apple shares will trade between now and the share split, as economic or company-specific news may have a greater impact on supply and demand for shares than the share split itself.
In short, investors should never buy shares only because they are about to be split.
However, Apple shares look impressive today. But the reason for that has nothing to do with the future stock split. Instead, it has to do with the company's stroking stability in an environment of uncertainty.
Apple's revenue for the third fiscal quarter increased by 11% year-on-year, and earnings per share increased by 18%. Analysts awaited revenue to decline by 3% and earnings per share by 6% over the same period, respectively.
"Our June quarter was proof to Apple's capability to innovate and deliver results in challenging times," said Luca Maestri, Apple's CFO, on Wednesday during a telephone conversation about the company's earnings for the third fiscal quarter. "Our results speak for the sustainability of our business, as well as the importance of our products and services to our customers' lives," Maestri said.
Showing growth across all segments, our third fiscal quarter results at this challenging time indicate growth potential when the economy recovers. It's this strong business, not the upcoming split of the technology company, that makes Apple stock a buy for investors willing to hold on to it for a long time.