Prediction: This Artificial Intelligence (AI) Company Will Split Its Stock in 2025 | The Motley Fool

Stock splits, particularly in the tech sector, have gained attention in recent months. As stocks such as Nvidia and Broadcom rose above $1,000 per share, they each executed stock splits, probably in an attempt to attract more prospective investors.

Amid this paradigm, it might surprise some investors that the stock split speculation may shift to Microsoft (MSFT 0.46%). Despite a stock price of around $420 per share, the chances of such a move are higher than some might assume. Here's why.

Microsoft's history with stock splits

Investors should first understand that Microsoft is in a drought in terms of stock splits. The company launched its IPO in 1986. Between 1987 and 2003, it initiated nine stock splits.

However, no splits have occurred since 2003. In a sense, this makes sense, as Steve Ballmer led the company between 2000 and 2014. During that time, the stock lost over 30% of its value, making any splits unnecessary. Since Satya Nadella became CEO, the stock has risen about 1,000%, taking Microsoft to a record-high nominal price.

Interestingly, that growth may not be enough to lead to a split. As mentioned, Nvidia and Broadcom had traded at much higher prices before their last stock splits, and with brokerages offering options for partial shares, stocks can drive small investors to buy, even at higher nominal prices.

Also, when it comes to the highest-priced stocks trading on the market today, Microsoft's price puts it barely in the top 100, a level that does not necessarily trigger a split in today's market.

Why investors should expect a split soon

Instead, the deciding factor may be one that investors tend to overlook -- the Dow Jones Industrial Average (^DJI -0.43%). Microsoft became one of the 30 stocks making up the index in 1999. Such a designation is a tremendous honor that has undoubtedly benefited Microsoft. Nonetheless, the Dow is a price-weighted index, meaning companies with higher nominal prices have more influence.

Moreover, of the Dow's 30 stocks, only Goldman Sachs and UnitedHealth Group sell for a higher price. That makes Microsoft one of the more influential stocks.

Additionally, one of its main competitors, Apple, is also a Dow stock. It likely faced similar pressure in 2020 when its stock price was in the $450-per-share range pre-split, not far above today's nominal stock price for Microsoft.

Although Apple did not explicitly cite pressure from S&P Dow Jones Indices and its parent, S&P Global, it executed a 4-for-1 stock split in August 2020, taking its shares to just above the $110-per-share range at the time.

That pressure does not give shareholders any clue as to how deep of a split Microsoft would approve. Its nine previous stock splits were either 2-for-1 or 3-for-2 splits. That history may or may not drive Microsoft's next split.

Still, at its current price, another 2-for-1 split would price it near many of the other Dow components. Furthermore, it supports a $3.1 trillion market cap in a market that has never had a $4 trillion market cap stock. Market cap milestones tend to give way gradually, meaning such a move would likely appease S&P Dow Jones Indices for the foreseeable future.

Microsoft as the next stock split?

Ultimately, Microsoft will likely split this year, and pressure from S&P Dow Jones Indices will probably be the deciding factor.

Admittedly, investors have become accustomed to higher nominal stock prices, and numerous stocks trade at higher prices than Microsoft. However, only two of those stocks are part of the Dow 30, a price-weighted index. Given the increased interest in the stock that comes with being part of the Dow Jones Industrial Average, expect Microsoft's board to do what it takes to remain part of that index.