Will Meta Platforms Make Waves with Its First Stock Split?

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have hit record highs this year, driven by excitement over artificial intelligence (AI) and stock splits. A stock split can adjust a company’s share price and outstanding shares without changing its market value or performance.

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Understanding Stock Splits: Forward vs. Reverse

There are two types of stock splits. Reverse stock splits aim to increase a company’s share price, usually necessary for companies at risk of being delisted from major exchanges. These can raise red flags for investors, as such splits often occur with struggling firms.

Conversely, forward stock splits attract investor enthusiasm. These splits make shares cheaper and more accessible to everyday investors. In recent months, numerous reputable companies have opted for forward splits, with only one going the reverse route.

A report from Bank of America Global Research indicates that companies undertaking forward splits have achieved returns over 12 months that are more than double those of the S&P 500 since 1980 (25.4% for the splits versus 11.9% for the index).

Meta Platforms: A Potential Split Announcement

As earnings season heats up, one company to watch is social media giant Meta Platforms (NASDAQ: META). As the parent company of Facebook, Instagram, and WhatsApp, Meta is preparing to announce its third-quarter results after the market closes on Wednesday, Oct. 30.

Interestingly, Meta has never executed a stock split despite its shares nearing $600 in October. While fractional shares are more available, many retail investors might still be unable to purchase Meta shares without a split.

Recent trends show that other major players in AI, such as Amazon and Alphabet, completed their stock splits in 2022. Given the current excitement around AI, the potential announcement of Meta’s first forward split could create significant buzz in the market.

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The Core Strengths that Make Meta a Solid Investment

While Meta’s AI and metaverse projects have been focal points in its recovery, investors should also recognize the fundamental aspects that contribute to its profitability.

During the last quarter, Meta reported 3.27 billion daily users across its platforms. This broad user base allows the company to command impressive advertising rates.

Moreover, Meta benefits from its resilience during economic downturns. Data shows that U.S. recessions are typically short-lived; most have lasted less than a year. This gives businesses that rely on advertising, like Meta, a strong opportunity to thrive in the long term.

As of June, Meta had a robust cash position, holding $58.1 billion in cash, cash equivalents, and marketable securities. It also generated around $23.4 billion in free cash flow through the first six months of 2024. Such financial strength provides the company with the flexibility to innovate and take risks.

Despite its significant growth, Meta’s shares remain reasonably priced at 23 times the projected earnings per share (EPS) for 2025. With expectations of continued double-digit EPS growth in the coming years, the potential for a stock split would be an added bonus for investors.

An Opportunity Not to Be Missed

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See 3 “Double Down” stocks »

*Stock Advisor returns as of October 28, 2024

Bank of America is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, Meta Platforms, and Nvidia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.