In a Not-So-Good Way, Super Micro's Stock Split Stands Out

Super Micro Computer Inc. is set to undergo a stock split next week, but unlike most stock splits in the S&P 500 this year, its performance has been far from ideal. The server manufacturer’s shares have dropped nearly 35% between the announcement of the split in August and Thursday’s close. This marks a stark contrast to the typical pattern observed in stock splits, where stocks often experience gains due to increased investor interest in lower-priced shares. According to Dow Jones Market Data and Birinyi Associates, Super Micro's decline is one of the most significant in recent years, with the last comparable case being DexCom Inc. in 2022, when it lost over a third of its value between the announcement and effective dates of its split.

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Stock splits don’t alter the actual value of shares, but they can boost investor interest. Investors are often drawn to stocks with lower share prices, even though fractional trading allows people to invest in expensive stocks without purchasing whole shares. Nevertheless, the perception of owning whole shares remains psychologically appealing for some investors. Furthermore, stock splits can offer other advantages, such as making options trading more accessible by reducing the cost per contract. Historically, many companies that have initiated stock splits did so when their shares reached high prices, making them seem “expensive” to retail investors. For example, Chipotle Mexican Grill Inc. announced a 50-for-1 stock split earlier this year when its shares were trading above $3,000, completing the process in June.

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In contrast, Super Micro was relatively new to having a high-priced stock. The company’s shares were below $100 as recently as April 2023, but by the time of the stock-split announcement in August, they had risen to over $600. As of Thursday’s close, the stock was down to around $400, reflecting a sharp decline since the announcement.

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Several factors have weighed on Super Micro's stock performance. The company announced the stock split alongside its fiscal fourth-quarter earnings, which revealed increased margin pressure, raising concerns about the profitability of its artificial intelligence (AI) servers in an increasingly competitive market. These earnings cast doubt on the company’s ability to maintain strong profitability in the rapidly evolving AI sector, where demand for high-performance servers is surging, but competition is intensifying.

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In addition to the disappointing earnings, Super Micro is facing potential legal challenges. The Wall Street Journal reported that the U.S. Department of Justice is conducting an early-stage investigation into the company, although the exact focus of the probe remains unclear. This legal scrutiny adds further uncertainty for investors and has contributed to the stock’s decline.

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Compounding the challenges, short-seller Hindenburg Research raised concerns about Super Micro’s accounting practices in a negative report issued last month. The report flagged possible discrepancies in the company’s financial reporting, which led to increased scrutiny of its financial controls. In response, Super Micro announced a delay in its annual filing while it reviews its accounting procedures. However, the company reassured investors that it doesn’t expect the review to lead to material changes in its reported financial results. Nonetheless, the delay has added to the cloud of uncertainty surrounding the company, further eroding investor confidence.

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Super Micro’s stock split is not the only notable technology stock split set for next week. Lam Research Corp., a chip-equipment manufacturer, is also due to complete its own stock split after the close on Wednesday. Like Super Micro, Lam Research has seen its shares decline since the announcement of its split. Lam revealed its plans for a stock split on May 21, and shares have fallen by about 12% between the announcement date and Thursday’s close. Despite these declines, Lam Research remains a prominent player in the semiconductor industry, and the split may still attract new investors seeking exposure to the sector at a lower price point.

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Stock splits have historically been viewed as bullish events. Earlier this year, analysts at Bank of America conducted a review of stock splits and noted that, on average, companies that enact splits tend to outperform the broader market. According to the analysts, stocks that split see average gains of 25% over the following year, compared to the 12% average gain for the broader market. However, the analysts also cautioned that stock splits are not a guarantee of positive returns. In their report from May, they pointed out that stocks experience negative returns roughly 30% of the time within 12 months of a split.

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In Super Micro’s case, while the stock split may present an opportunity to attract new investors with the lower price per share, the company still faces several challenges, including legal uncertainty, accounting concerns, and competitive pressures in the AI server market. Whether the stock will follow the historical trend of post-split gains remains uncertain, especially given the significant hurdles it faces. Investors will be watching closely as the split goes into effect and the stock begins trading on a split-adjusted basis next week.

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