Apple Stock Split: 2 Theories

| About: Apple Inc. (AAPL)


Theory 1: Making AAPL stock more accessible to a larger number of investors may help to grow brand ambassadors.

Theory 2: AAPL is angling to be in the Dow Jones Industrial Average as a way to strengthen its already strong brand and communicate permanence.

AAPL's stock split is decidedly intentional, just like everything else that AAPL does.

Sometimes, investing feels like playing poker: you try to figure out what your opponents have, despite the appearances they project. I subscribe to Warren Buffett's investment principle that owning a stock is like actually owning a piece of a company. I try and imagine working at the companies for which I am a shareholder. In general, this view causes me to have faith in the decisions made by the companies I invest in. Still, it is admittedly quite fun every once in a while to muse over underlying motivations for large, unexpected company actions.

When Apple (NASDAQ:AAPL) declared a seven-for-one stock split, people immediately began speculating about the company's underlying motivation. Because I tend to believe that Tim Cook is generally forthright (it would probably hurt Apple's brand to have a CEO who wasn't), I like to center my thinking on Cook's stated reason for the split: essentially, to make the stock more accessible to a wider audience. I believe that Cook and the rest of the Apple team do want their stock to be owned by a larger number of people and, further, to be owned by people who want to pay around $80/share. Being an Apple shareholder has increased my desire to own an Apple product. I wouldn't be surprised if this is a normal phenomenon. Perhaps Apple is hoping to tap into shareholder loyalty to drive brand dedication and product sales. By enabling the common investor to own a piece of Apple, Tim Cook and his team have created an opportunity to grow brand ambassadors - essentially, Apple fanboys and girls (and men and women). When you feel that you share in the success of a company, you are more likely to appreciate what makes the company good and to extol the virtues of the company to your friends. At around $80/share, Apple will have "manufactured" a stock price that I believe will appeal to the type of investor Apple is targeting. When I think of Apple, I think of the iPhone. When I think of the iPhone, I think of $199. When I think that I could own Apple at $80/share, I think, "Wow, if I were an emotional investor, I might actually think that was a steal!" But that's the thing: Apple might actually want emotional investors. To have the most loved product on the face of the earth, you may need to attract people who are abundantly emotional (let's face it - loving a phone is just weird).

One theory regarding Apple's stock split is based on the notion that Apple is trying to be added to the Dow Jones Industrial Average. I find this theory to be less compelling than the one outlined above. I do, however, think it could be possible that there is a slight advantage to Apple in the form of branding if the company were to be added to the Dow. If you happened to catch WWDC 2014, you might have noticed that a large part of Apple's business model increasingly relates to the seamless interconnection of products and software. Consumers are promised a workflow that rewards the purchase of multiple Apple products. This encourages people who are new to the Apple "ecosystem" to spend more cash on Apple's offerings. Being added to the Dow might have the slight effect of communicating to people who are not yet a part of the Apple jungle that they are missing out. In the same way that banks tend to be housed in solid stone structures (intended to communicate permanence), Apple may soon be in a position to say, "Hey, look at us - we're in the Dow, which means we're legit and we're here to stay." Having confidence that your products are going to be updated and serviced by a company that will exist well into the future (not always a guarantee in the tech sector) may be enough to win over some reticent clients - especially those who are looking to build out whole systems on top of products like the iPad. If your company used to run on BlackBerry, I would be willing to bet that management was especially careful in considering which platform would support the company moving forward. You don't still use BlackBerry phones, right?

Apple says it wants to compete in the high-end technology sector, and tends to keep its product prices high. This is a company that is, out of necessity, acutely aware of its brand. Clearly, Apple doesn't believe that a lower stock price negatively affects its brand. This mostly makes sense, since a stock split in and of itself doesn't change the underlying value of the company. However, the specific split and resulting share price feels intentional. If Cook's Apple wanted to make the stock accessible to the widest audience possible, it would have presumably manufactured an even lower post-split price. Apple tends to have sound reasons for its actions, which is something I love about the company, and explains why I am long AAPL. But this also makes me think that the price point after the split is not an arbitrary number and may hold the answer to the puzzling question, "Why did Apple split its shares?"

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.