Nvidia will soon be a more affordable stock for individual investors. And if you already own the $3 trillion chip giant, you’re about to have more shares at a lower price.
Nvidia’s big 10-for-1 stock split takes effect Friday after the closing bell. Shareholders of record as of Thursday, June 6, will get nine additional shares of the stock after the close on Friday.
A stock split could eventually pave the way for Nvidia to be added to the Dow Jones Industrial Average, which is a price-weighted average instead of a market-cap weighted index like the S&P 500. Nvidia, at its current price, would be the largest component in the Dow. But it would be in the middle of the pack following the stock split. Nvidia competitor Intel is struggling and currently has the lowest weighting of any Dow component, with a stock price of just above $30.
Nvidia will begin trading at its lower post-split price Monday morning. So if you own one share, currently trading at about $1,210, you’ll wind up on Monday with 10 shares at a price of around $121.
What happens after that though? Nvidia’s stock has already surged ahead of the split, climbing nearly 30% since the announcement of it was made on May 22. The split isn’t the only reason for Nvidia’s latest bull run. The company also reported strong sales and earnings and a healthy outlook a few weeks ago in addition to the stock split. It also disclosed plans to raise its dividend, which is still tiny, by 150%.
So can Nvidia, which is up more than 150% in 2024, keep heading higher? That will largely depend, of course, on whether the company continues to post above average increases in earnings and revenue. And the artificial intelligence boom seems to be only in its early stages.
But history also shows that companies that split their stock tend to outperform after the split, even though nothing fundamentally changes about the company. It’s incorrect to say the stock is “cheaper” since its market capitalization, price-to-earnings ratio and other valuation metrics don’t decrease following a split.
According to data from BofA Global Research, average returns for companies announcing stock splits are about 25% during the 12 months after a split is announced versus 12% gains for the S&P 500.
It makes sense. Companies announcing splits in the first place tend to be ones with a rising stock price due to strong earnings momentum. So it stands to reason that a company like Nvidia should continue to do well after a split, especially if the lower share price entices more individual investors who may have been scared off by a quadruple-digit stock price.
It’s also worth pointing out that Nvidia’s stock actually is trading at a lower valuation now than it was earlier this year, despite the stock’s pop. Nvidia has a price-to-earnings ratio of about 45 based on this year’s earnings forecasts. But Nvidia was trading at a P/E of nearly 60 in February. The stock has gotten “cheaper” because earnings estimates have risen sharply over the past few months.
“Nvidia is still going higher but the valuation has been cut,” said Jeff Mills, chief investment strategist at Bessemer Trust. “Stocks can continue to run as long as earnings go up.”
That could very will wind up being the case for Nvidia after its split. Two other high-profile stocks that recently split their shares have maintained their momentum as well. Walmart is up more than 15% since a 3-1 stock split in February. And Amazon has surged 50% since splitting two years ago.
So don’t be surprised to see more blue chip companies joining the stock split parade in the coming months.
Comments