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.
Avoid speculation
Even though many investors are likely 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 likely 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 likely 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 likely come close to the appreciation the stock has seen during the last few years.
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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
