Why do some huge companies have such low stock prices?
Why do some great and well known companies that sell a lot of products and services have a lower stock price than other less profitable companies? For example, Apple, the most valuable company in the world, has a stock price of around $120 while Berkshire Hathaway has a stock price of over $200,000. Why is that?
This is a great question, and Berkshire is a good example to illustrate. Berkshire has two "stocks," or share classes. There's Berkshire A shares (Brk.a), with a current share price closing in on $250K, and Berkshire B shares(Brk.b), around $160/share. Big difference in price, but the underlying assets, or the companies held by Berkshire A and B shares, are the same. The same companies are held, but one is a fraction in price of the other. That's because the number of shares outstanding are significantly different. You would have to hold roughly 1,500 shares of the B class to equal an A share, but if you did, they would be equivalent. Berkshire Hathaway created these shares in order for smaller investors to have access to the stock.
Likewise, Apple could have a stock in the thousands, but they "split" the shares, in order for smaller investors to get in on the action. At some point, the shares got too expensive, and so they split them up. If you held 100 shares of Apple at $200, maybe you now hold 200 shares at $100. It doesn't change your holdings, but it does allow someone who can't afford $200 shares to purchase them at $100. Sometimes, companies do this because the price has grown prohibitive for many investors, like Amazon's current share price of $800. Companies can also do a reverse split, which is the opposite. Raising the price of a stock by merging shares to create less outstanding shares available to have the appearance of a more valuable stock.
The actual stock price of a company has nothing to do with how profitable or valuable the company is. In very simple terms, the value of a public company is determined by the stock price multiplied by the number of outstanding shares. So in theory, you could have a company that is trading at $1,000 per share and have 100 outstanding shares for a total market capitalization of $100,000. Compare this to a company that is trading for $10 per share and has 100,000 outstanding shares for a total market capitalization of $1,000,000.
Back in 2014, Apple was trading around $700 per share and did a stock split of 7-1. When this took place, shareholders shares were multiplied sevenfold, but the price of Apple was reduced sevenfold. So if you owned 100 shares of Apple at $700, your total investment was worth $70,000. When Apple split 7-1, you would have owned 700 shares at $100 per share for a total investment of $70,000.
In some cases, the price of a stock appreciates so much that it makes it hard for everyday investors to buy shares. The volume of trading is reduced and the stock is harder to buy or sell. This could increase spreads (the difference between the buy and sell price). By doing a stock split, the price is reduced and it allows for more investors to begin buying/selling the stock.
It's not the share price itself that determines that value of the company, but what you get for that share. In other words, how much earnings per share (EPS) do you receive is one common value metric, and there are many others. But you have to take into account shares outstanding against revenue, cash flow, or earnings to compare apples to apples.
And speaking of Apple, they did a 7 for 1 stock split about 2 years ago. They were around $700/share, but post split, they now had 7x as many shares at $100. The excuse was to make it more affordable for smaller investors, but the real reason is so they could be included in the Dow Jones Industrial Index. You see, the Dow is a price weighted index (the worst kind) so the highest price stock has the most influence regardless of total revenue, earnings, or market capitalization. But to be included in the Dow, they want your stock to be around $100/share for inclusion, at least at the beginning. So Goldman Sach at around $240 has almost twice as much influence than Apple at around $130, but I would consider Apple a more value company with much more revenue and almost 7 times as big. This, along with the small sample size of 30 stocks on the Dow, is why professionals use the S&P 500, the largest 500 companies in the U.S., or the NASDAQ to gage true market strength or weakness.
You have asked a good question that many investors wonder about. But if you break down the earnings, revenue, or any other company element on a per share basis, it will make much more sense to you. Some stocks split often, while others don't. The larger Berkshire A Shares have never split which is why they are so "expensive." But when broken down on an earnings per share basis, they are not at all.
Hope this helps, Dan Stewart CFA®
Good question. The actual stock price has little to do with the value of the company. You could have a very small company issue a small number of shares and sell for a very high price.
There are many metrics to look at when looking at a company. The most common are market capitalization and P/E ratio, or price to earnings. The market capitalization will generally tell you how large a company is. The Price to Earnings will tell you how much you are paying for a dollar of earnings. If Apple never had a split, it would trade for a much higher price too, just like Berkshire.
Buffett feels that a split and the lowering of his stock price would affect his ability to manage; too many owners applying too many bad short-term pressures. He did issue a second share class, class B, with less rights than the A shares, but it trades a much lower price. Investopedia does a good job explaining it.
A stock split and a lower stock price really has nothing to do with the size or profitability of a company. You generally do see smaller, less profitable companies trade for very low prices, especially those below 5 dollars, but generally, it does not reflect on the actually profitability of a company.
Berkshire has a market cap of $400 Billion and a PE ratio of 17x -- Appl has a market cap of $690 Billion and a ratio of 15x
I hope this helps
Mark Struthers CFA, CFP®
I believe that it is primarily a marketing decision by company management as to who they want for shareholders to own their company. If a company's stock price is high in relation to its publicly traded competitors, management may decide to implement a stock split to bring the price per share more into alignment with other companies within its industry. Apple did this several years ago when they issued a 7:1 stock split, essentially reducing the cost per share from around $630 to $90.
Some novice investors may erroneously believe that they are receiving more value for their money by being able to purchase more shares of a company at a lower price per share. Companies that issue stocks at low prices (<$5 per share) may be catering to this type of thinking by certain investors. This pricing decision may attract shareholders that are more inclined to sell for a quick profit (e.g- if the stock moves up from $2 to $4 per share).
By contrast, Berkshire Hathaway's lead owner Warren Buffett has stated on numerous occasions that he is looking to attract the type of shareholder that is a serious long term buy and hold investor. He believes that his companies benefit by keeping shareholder turnover very low. To attract those long term investors, he has consistently refused to implement stock splits on BRK-A shares, asserting that only serious long term investors would consider buying such a high priced stock. Once the popularity of the A shares pushed the stock to a lofty price ($70,000 per share or so), he succumbed to pressure from shareholders to issue a Class B share (BRK-B) which was initially priced at 1/30th of the Class A shares. This allowed serious long term investors who had earlier missed the opportunity to purchase his Class A shares to buy into the company through the Class B shares at a lower price. After the purchase of Burlington Northern Santa Fe in 2010, Buffett split the Class B shares by 50:1. Now the Class B shares now represent only 1/1500th of a Class A share.