Most milestones have an arbitrary quality, relying on the roundness of a number to make 500 seem more meaningful than, say, 493. But stock-price milestones have an extra layer of meaninglessness. If you know why, you can stop reading. However, the huge amount of media coverage for Google’s stock price breaking $500 last week suggests to me that some people might want to read on.
Here’s the problem: A company’s stock price is not comparable to other companies’ stock prices, nor is it necessarily comparable to itself over time. This is because the stock price represents the market value of the company divided by the number of outstanding shares. So changing the number of outstanding shares can change the price without changing the value of the company.
An example: Microsoft’s share price is currently about 6% of Google’s share price, yet Microsoft’s market value (share price x shares outstanding) is roughly twice that of Google’s. The difference is, Microsoft has a lot more shares outstanding.
In fact, since going public in 1986, Microsoft has split its stock nine times. A split is when a company issues multiple new shares per existing share, often 2 for 1 but sometimes with other ratios.
At this point, a single share of Microsoft IPO stock—that is, before any of the splits—would equal 288 shares of current Microsoft stock. As of today’s closing price ($29.36), that original share would now be worth $8,455.70. But something tells me that the press is not readying articles about Microsoft’s breaking the $8,500 barrier.
By contrast, Google has never split its stock. Combine that with Google’s fantastic run of financial performance, and you get $500 per share, a number rarely seen with tech companies. That sounds like news until you realize the number is rarely seen because other high fliers have chosen to split their stocks well before reaching $500.
And we haven’t yet mentioned the reverse split, where a company reduces the number of outstanding shares, thus raising the price. Some of the dot-com-era survivors did reverse splits to get their stocks up to respectable-sounding prices. Reverse-split at a high enough ratio, and you’ve got a $500-per-share stock.
You get the idea. An actual milestone measures the distance of a mile. With a stock-price milestone, your mileage may vary.