For several months, investors have been wondering whether Nvidia (NASDAQ:NVDA) would initiate a stock split. That’s after shares of the tech giant soared in recent years, reaching nearly $1,000. And it actually hit $1,000 this week in the trading session following Nvidia’s earnings report and news of a stock split. After the split, the chip designer’s shares will trade at a much lower level.
But this decision will not change Nvidia’s market value, estimated at $2.3 trillion. Instead, a stock split involves issuing more shares to current shareholders, which will result in more shares trading at a lower price; current shareholders will be left with the same monetary value of the shares as before the split. The price drop will make the stock accessible to a wider range of investors, and Nvidia even stated in its announcement that this was its motivation for making this decision.
So now, with Nvidia taking the step many investors have been waiting for, is it time to buy the stock?
Why are investors interested in stock splits?
It’s important to note that it’s not a good idea to buy a stock just because the company has initiated a split: this is simply a mechanical transaction. A stock split This in itself will not cause the value of a security to rise or fall. So now you might ask, if that’s the case, why are investors so interested in whether a company will split its shares?
In many cases, this move suggests that a company is optimistic about its future and believes its stock has what it takes to take off again. Generally speaking, the company has performed well from an earnings perspective in recent years, which has led to the share price increases we’ve already seen. Today, by splitting its shares, a company is implying that these gains are not over and that from the fall in the share price, it can still skyrocket and even possibly return to its level before the division.
Now consider the Nvidia transaction, a 10-for-1 stock split, effective June 7. This means that if you own one Nvidia stock today, after the split you will own 10 shares, but the value of your stake will remain the same. . And if you buy Nvidia stock after the split, if it was still trading at $1,000 before the split, it would drop to $100 per share after the split.
This maneuver will make it easier for investors who do not have access to fractions of shares or those who prefer to buy whole stocks for investment. And the $1,000 mark represents a psychological barrier for some investors, who would automatically hesitate to buy even if the valuation is reasonable. Splitting Nvidia shares will remove this barrier and open the way for them to enter this tech giant.
Nvidia’s five stock splits
Nvidia is no stranger to stock splits, having completed five in the last 24 years. And every time Nvidia announced a split, the stock price was significantly lower than it is today. So I’m not too surprised that Nvidia has decided to do this now.
Back to our question: is it time to buy the stock? It is, but not because of Nvidia’s upcoming stock split. Nvidia shares climbed after its previous stock splits, but the move was driven by increased revenue at the company and demand for its products.
And a look at Nvidia’s recent earnings report and the general AI market gives us reason to be optimistic about the future. The company reported triple-digit growth in revenue and net profit in the first quarter of fiscal 2025, with revenue reaching record levels. At the same time, gross margin is on the rise, widening to over 78%, making Nvidia increasingly profitable.
The company says demand for its products and services is outpacing supply, and as Nvidia prepares to launch its new Blackwell architecture and most powerful chip ever, it’s easy to imagine demand remaining strong. Especially considering AI market forecasts. Analysts predict the market will reach more than $1 trillion by the end of the decade. All of this supports the idea of ââincreased growth for Nvidia.
Meanwhile, Nvidia shares are trading at around 34 times forward earnings, which seems very reasonable given the long-term outlook. This makes Nvidia a buy whether you do it before or after the stock split.
Should you invest $1,000 in Nvidia right now?
Before buying Nvidia stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Nvidia wasn’t one of them. The 10 selected stocks could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $652,342!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns May 13, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool Ranks and Recommends Nvidia. The Mad Motley has a disclosure policy.
Nvidia just announced a stock split. Is it time to buy? was originally published by The Motley Fool
