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Written by Jeremy Bowman for The Motley Fool
Micron's share price and profits have soared during the AI boom.
Nvidia split its stock in 2024, setting a precedent for Micron to do the same.
The company also seems due to raise its dividend or accelerate its buyback program.
Micron (NASDAQ:MU) is set to report earnings after hours on Wednesday, and all of Wall Street will be watching.
As one of the three major memory chipmakers, along with Samsung and SK Hynix, Micron has been one of the best-performing stocks over the last year, benefiting from a memory shortage that has led to prices skyrocketing.
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In its June earnings report, revenue jumped 346% to $41.5 billion, and it reported a net profit margin of 80.4%, a level virtually unheard of for any company, underscoring how high memory prices have gotten. Net income in the quarter jumped from $1.89 billion to $28.2 billion.
Looking ahead to the fourth-quarter report due out Wednesday, analysts expect revenue to jump 354% to $51.4 billion, and for adjusted earnings per share to jump from $3.03 to $31.71.
Based on that forecast, Micron now trades at less than 9 times run-rate earnings per share. Its forward P/E based on expected fiscal 2027 earnings is less than 7. The surging profits make Micron a good candidate for accelerated share buybacks, but the CHIPS Act restricts its buybacks until Dec. 9
Micron now trades above $1,000 a share, and the jump in price and profits makes the memory chip giant a natural fit for a stock split, which it has not done since 2000.
With Micron now trading at $1,067 per share as of this writing, it has one of the highest share prices in the S&P 500.
Most companies don't have share prices above $1,000 because they split their stocks when the share price gets that high. Nvidia, for example, did a 10-for-1 split in 2024 when its share price was around $1,200.
With Micron stock now trading around that level and the stock experiencing a similar earnings boom, a stock split makes sense.
Enacting a stock split doesn't change the fundamentals of the stock. It just cuts the shareholder pie into more pieces. However, it does have some real impacts. First, it makes individual shares easier to buy, which could encourage retail investors or employees to make small-dollar purchases of the stock. Similarly, it makes it easier to trade options on the stock, since options contracts are based on 100 shares, thereby increasing liquidity.
Finally, a stock split shows confidence from management that the share price can keep going higher. They tend to act as milestones, resetting the stock price so that it can rise again. There's also evidence that stocks tend to outperform over the 12 months after a stock split, according to research from Bank of America. That may reflect the timing of the move, as management decides when to split its stock, and it's likely to do so when it's confident the stock can keep going up. Stock splits also tend to be received well by shareholders.
With the stock up more than 1,000% over the last year and a half, investors are due for an increase in capital returns or a stock split.
Management is likely to accelerate share buybacks after the Dec. 9 rule change, but a dividend hike would also make sense as well, as its yield has fallen to just 0.05%. Nvidia, facing a similar situation, recently raised its dividend by 25x, and it just announced a $150 billion share buyback program.
Still, with Micron shares now above $1,000 and profits soaring, a stock split makes the most sense. Doing so would reward investors, reset the stock price, and make it more accessible. There's a good chance Micron splits its stock before the end of the year, and the stock could soar if it does.
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Bank of America is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Bank of America, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.