June 4, 2014
By Marc Fogarty, CPA, CFE
Some are touting that this is the second coming – the second coming of the Internet tech bubble, that is. There are the hallmark signs of high company valuations, low profits and the most recent news of stock splits like the one recently announced from Apple.
Stock splits were very popular in the late 1990s because it made stock affordable to the average investor. But today, splits are rare and many stocks like Apple, Priceline, Google and Amazon are upwards of several hundred dollars per share. With a stock split, there is anticipation that cheaper per-share prices will appeal to more buyers, thereby increasing the stock price.
And why wouldn’t a company decide to split its stock? A company’s value does not change with a stock split and the media buzz has already driven Apple stock higher. Yes, there are negatives. Investors may look at the lower priced stock as a short-term rather than long-term investment, which could lead to a large pull out if investors get skittish.
Apple’s stock split news might be reminiscent of the period before the bubble burst but it’s important to note some key differences between then and now. In the late 1990s, Internet technology was still fairly new and companies were still figuring out how to use the new medium. Now, the Internet is firmly entrenched in our daily lives with smartphones and tablets (thank you Apple).
Investors are now better able to differentiate the technology market segments that have evolved. For example, King Digital Entertainment, the makers of Candy Crush, may not have done well in its IPO, but that did not affect the rest of the market. Twitter, a social media company, might have a bad day in the market but other tech companies, like Apple, could see increases. Even though all of these companies are in tech, they all provide a substantially different product.
We’ll continue to follow the Apple stock split when it comes to fruition in June; but, for now, there are enough differences between then and now that it’s not clear we are in another bubble.