Splitting Stocks

Take a 20 ounce cup of tea and pour it into to two 10 ounce cups. Of course, the amount of tea hasn’t changed. The taste of the tea hasn’t changed. Microvision announced that it might split its stock (MVIS) to drive up the price. But nothing will really change because the number of shares will go down as the price goes up. Many investors celebrate stock splits. I always vote against splits because nothing has really changed, except that someone gets paid to pour the tea from cup to cup. I’m more interested in getting more tea.

Microvision received a delisting notice from NASDAQ. The stock price had been too low for too long. NASDAQ has rules against that. NASDAQ has standards. If a stock’s price is too low it can be a sign that the company is not viable and that the market is not giving the company a high enough value for the stock to be listed with NASDAQ. NASDAQ wants to encourage small companies to grow, but it also has rules that remove companies that don’t perform well enough or that get too small. MVIS has essentially traded below $1 since about August 2011. Microvision’s grace period is about to run out. Something must be done to get the price above $1, preferably $5.

In a rational market, stock prices reflect a company’s worth. Rises and falls are based on news and speculation. Present value is based on future value, with modifications for risk and reward. Ideally, Microvision could raise its stock price by releasing good news. As I’ve written in earlier posts (Micro Vision), Microvision is always on the cusp of good news. Secret products, if they exist under the cover of non-disclosure agreements, could be launched releasing the company from news moratoriums. Critical suppliers could dramatically increase component volumes and decrease prices. MVIS pops whenever an Apple product rumor includes an embedded projector. MVIS moves with the supply of direct green lasers, a critical component that is so restrictive and expensive that it has resulted in products being sold at a loss. There are plenty of opportunities for good news.

Unfortunately, as I type this, no news has been big enough to move the price above  $0.50 since the middle of November. There was no surprise Christmas shopping season announcement. The news out of the Consumer Electronics Show in Las Vegas wasn’t enough to budge MVIS.

So, the company is going to split the stock. They haven’t announced the exact split, but it is possible that my friend who owns 20,000 shares will own 4,000 shares. The price will be five times higher, but the total value will be nearly the same. The actual value of the company will decrease by the cost of the transaction. The perceived value of the company may be improved, but I doubt that. Supposedly, some investment institutions can’t buy stocks below a certain price, but they are also probably restricted from buying below a certain market cap. In the various stock splits conducted to raise a price of a stock I’ve owned, I can’t recall any that actually made a difference.

The thing that makes a difference in a company’s stock is improved performance from the company. Do well and the price eventually rises. It takes courage to wait for the good news to come and survive the interim consequences. I know one company that did that. They let their stock be delisted, and they’ve survived. Ironically, they are the result of a spin-off from Microvision and a merger called GigOptix (GGOX.OB) and I like the way they handled a similar situation.

GigOptix designs, produces, and sells the switches that let us stream videos and download massive software updates. When they merged with Microvision’s spin-off called Lumera, neither GigOptix or Lumera was doing well enough to be comfortably listed on the NASDAQ. The new company soon received a delisting notice. They accepted the delisting. The stock didn’t vanish. It merely moved to one of NASDAQ’s suburbs. That’s why its trading symbol ends in a .OB. Many investors never visit that neighborhood, and have plenty of justifications for their reluctance; but the company continues to operate and intrepid investors, like me, can still buy stock.

Back in May I posted a quick analysis of MVIS versus GGOX.OB (Overlooked Upstart Seedlings). GigOptix had seven times the revenue and one-quarter the market cap of Microvision. Their market caps are closer now, but that’s mostly because MVIS’s stock price has dropped. No matter. GGOX.OB gets closer to being relisted as their revenues grow.

Stock splits were celebrated during the internet bubble because it was usually a sign that the price had risen enough to make it hard for individual investors to buy shares. Many companies kept their stock price between $10 and $100. It is in the dismal times that followed that reverse splits like Microvision’s became more common.

Just as GigOptix didn’t worry the machinations on their ride down, other companies haven’t split their stock on the way up. Berkshire Hathaway’s stock (BRK.A) has a price above $100,000. Their CEO, Warren Buffet, decided that he wanted investors who were committed, interested in the long term performance of the company, and weren’t interested in the random daily ups and downs of the stock. Berkshire Hathaway has about the same market cap as Microsoft, even though MSFT’s price is about $30. The difference is the number of shares, nothing else.

Microvision’s management is strongly considering their stock split. They’ve put it up for a shareholder vote. I’ll vote no. I always do. Share price is partly a measure of management’s performance and splitting the shares hides ineffective management. I’d rather they displayed courage and confidence, rather than retreating to convention and artifice. The company should be able to succeed on its merits. I have faith in it. It can weather what it needs to weather. Be strong enough to spend time on what matters, and don’t spend time just pouring lots of cups of tea back into a teapot and spilling some drops of costs along the way. Besides, that much pouring tends to cool off the tea. Get to work building the fire.

About Tom Trimbath

real estate broker / consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: https://trimbathcreative.net/about/ and at my amazon author page: http://www.amazon.com/-/e/B0035XVXAA
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3 Responses to Splitting Stocks

  1. R Hughes says:

    Good post, which is essentially about applying financial integrity to corporate financing. (And a nice tone of calm rationality re: the de-listing, which I’m sure is a comfort to folks who may not realize it doesn’t mean you can’t trade de-listed stocks!) Thanks!

  2. I just voted No – of course.

    There were three choices: Yes, No, Abstain. I admit to wanting a fourth choice: disdain. That would be an interesting option in shareholder, and even governmental, elections. Imagine being able to vote yes, or no, or abstain, or disdain – and then include something less clinical or cynical like heartily approve (which I some day look forward to using). But for this vote – No.

  3. RD says:

    I have to hand it to you. You are incredibly committed to this company! I wish I shared your vision, but as far as I can see, events of 2012 are soon to repeat. And, damn, this burns me to the core. A 2009 10k stock investment in MVIS, is presently worth $148! Sadly, another reverse split is likely to occur (I don’t see there being any other options)…https://www.microvision.com/microvision-completes-1-for-8-reverse-stock-split/
    I too will definitely vote “disdain”, if optioned.
    But, on a lighter note, my investment in MVIS hasn’t been an entire loss. Gains of non monetary value have likely occurred…
    Character is best formed in the stormy billows of the world. ~ Johann Wolfgang Von Goethe

    I’m sorry to have vented on your blog.

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