Apple had an astonishingly good earnings call yesterday. Scratch that: It was absolutely phenomenal. Despite the pandemic and the severe economic consequences it has caused, despite Apple closing virtually all of its retail stores at some point during the last quarter, and despite disrupted supply chains around the world, Apple posted record third-quarter results.
Apple brought in a record Q3 revenue of $59.7 billion and net quarterly profit of $11.25 billion during the period, which runs from March to June. (Apple’s third-quarter doesn’t match a calendar year third-quarter.) Even its gross margin was up YOY for the quarter, rising to 38%.
Announcing the results, CEO Tim Cook confirmed the company experienced “double-digit growth in both Products and Services and growth in each of our geographic segments.” Luca Maestri, Apple’s CFO, expanded on that, saying, “The record business results drove our active installed base of devices to an all-time high in all of our geographic segments and all major product categories.”
But besides announcing a record quarter, Apple also announced it will split its stock in a 4-to-1 offering come August. A stock split is a rare event for Apple (and most companies). Matter of fact, Apple has only split its stock four times since going public. Here’s what a stock split means for Apple and investors:
- What’s a stock split? Simply put, a stock split means a company has chosen to divide existing shares into two or more shares. For example, a 2-for-1 stock split means for every previous one share of stock, there are now two. Therefore, Apple’s upcoming 4-for-1 stock split means that, once the split takes place, there will be four shares of AAPL stock for every one share that exists today.
- So will owners of Apple stock before the 4-to-1 split have four times the amount of shares once the stock splits? Yep. Say you own 100 shares of AAPL today. When the stock splits 4-to-1 in late August, you’ll then own 400 AAPL shares.
- Does the 4-to-1 stock split mean the value of my AAPL shares will increase four times? Unfortunately not. The side effect of a stock split is that the increase in shares means every share is now worth less. For example, let’s say a company offers a 4-to-1 stock split like Apple is doing, and their share price is $100 before the split. When the stock goes through its 4-to-1 split, every shareholder will have four times the amount of shares, but those shares will only be worth $25 each now. In other words, the stock split doesn’t make investors more money.
- Does the stock split make Apple a more valuable company? No. Apple’s market cap will remain the same before and after the split. Let’s say Apple is worth $1 trillion dollars (it’s worth more, but let’s just use an easily divisible figure for this example). And let’s say only 100 shares of AAPL exist. So in this case, each share of AAPL would be worth $10 billion ($1 trillion/100). But then the stock splits 4-to-1. Now there are 400 shares of AAPL. (Every one of those previous 100 shares is now four shares.) However, each of those shares is now worth four times less because there are four times more of them. That means the new post-split shares are worth $2.5 billion each. And 400 shares times $2.5 billion equals, you guessed it, $1 trillion dollars—the exact same market cap AAPL had before the split.
- So why bother splitting the stock? It’s mainly a physiological thing. The 4-to-1 stock split will reduce Apple’s current share price by a factor of four, making it look cheaper. This could entice new buyers to snap up Apple shares because shares will be cheaper to acquire.
- When do Apple’s shares split? Apple will split its shares 4-to-1 on August 31, 2020. On that day, previous (and still current) owners of AAPL will have four times the amount of shares that they had the day prior, but all their shares will be worth four times less. But, as explained above, the total value of their AAPL shares will remain the same (discounting, of course, AAPL price rises or falls on August 31).