NEW YORK (CNN/Money) -
Tech company sales and earnings are booming. Internet stocks are scorching. And everybody's salivating about the next big IPO (Google, but of course).
But you know what trend in tech really reminds me of the late '90s and early 2000? It's the return of the stock split.
Remember companies like Ariba, BroadVision and Commerce One? They all split their stocks at the height of the tech bubble when their share prices hit triple digit levels. Now, all three stocks trade in the single digits.
BroadVision and Commerce One even had to resort to another kind of split, the reverse stock split, in the past few years. That's when a company reduces the number of shares outstanding to prop up the stock price.
Well, Yahoo!, National Semiconductor, Research in Motion and Cognizant Technology are a few tech firms that have announced splits recently. And in the past two months, gravity-defying techs Netflix, OmniVision, SanDisk and Activision have all split their stocks.
There's even been some market chatter lately that eBay, which just split its stock 2 for 1 in August, is getting ready to announce another split since its shares are trading near their all-time high.
Splits do not change a stock's value
Investors need to be wary of buying stocks simply because they are splitting their shares. Splits may make stocks appear to be less expensive but they do nothing to change the actual value of a company.
Let's say you own 50 shares of the hypothetical PRL Internet and they are trading at $50 a share. If PRL Internet announces a 2-for-1 stock split, you'll wind up with 100 shares that are worth $25 a share.
So yes, the shares are technically "cheaper" in that it costs less to own one. But the value is still the same. All a split does is increase the total number of shares outstanding.
Sure, splits can be beneficial to the average investor because the lower the entry point to buy the stock. The usual spin by companies announcing stock splits is that they are doing so in order to increase their shareholder base and liquidity.
There is some truth to that. eBay, for example, was trading at more than $112 a share before it announced its split last year. And some companies, most notably Warren Buffett's Berkshire Hathaway, never split their stock. As such, Berkshire's class A shares currently trade at about $93,300...not exactly pocket change for most investors.
For a look at more companies that have announced recent splits, click here
So the problem with stock splits is not the split per se. It's when investors get ridiculously excited about a company merely announcing a split.
Just take a look at Taser, the maker of stun guns. The company split its stock 3-for-1 in February and announced another split, this time 2-for-1, earlier this month. The latest split takes effect Friday.
When Taser announced the first split in January, shares surged 14 percent on the news. The day the split took effect, shares rose 15 percent. And when Taser announced its latest split on April 6, the stock gained 17.5 percent. That makes absolutely no sense. Nothing about the company's fundamental business outlook changed with these splits.
From split to splat?
Shares of some of the other recent splitters also surged after they announced their split plans, although in several cases, the splits were announced in tandem with strong earnings reports, making the moves a little more rational. That happened with Netflix and Yahoo!
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Shares of NetFlix have taken a nosedive since the company announced a 2-for-1 stock split.
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Still, investors should remember that companies are not more attractive just because they are splitting their stock. If anything, a split could be a warning sign, an indication that a stock has risen so much that the company feels the need to artificially lower the price in order to keep momentum going.
In fact, shares of several tech companies that have announced splits in recent months have cooled considerably since their split announcements.
Research in Motion has fallen more than 14 percent. Netflix is down nearly 20 percent. OmniVision has tumbled 18 percent since its split announcement. SanDisk has plunged nearly 30 percent.
Splits don't guarantee future success. You would think investors learned that the hard way.
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