Should You Buy Nvidia Stock Before June 6?

Should You Buy Nvidia Stock Before June 6?

The time has come: NvidiaIt is (NASDAQ:NVDA) The long-awaited first quarter report capped an exciting earnings season for artificial intelligence (IA) investors.

Indeed, revenues are booming thanks to growing demand for Nvidia’s H100, A100 and Blackwell graphics processing units (GPU). Even better? The company’s pricing power helps Nvidia achieve consistent margin expansion and profitability.

Nvidia is currently riding a unique growth wave. Their earnings report contains so much information that it’s easy to get distracted by the latest record the company released.

While the financial performance was undoubtedly impressive, one part of the earnings report really caught my attention: Nvidia announced a 10-for-1 stock split.

According to the earnings release, investors holding Nvidia shares as of market close on June 6 will be eligible for the split-adjusted shares.

Let’s break down how the stock split works and explore why acquiring Nvidia stock now might be a good idea.

How does stock split work?

Stock splits are a form of financial engineering. When a company splits its shares, two important things happen.

First, the number of shares outstanding increases according to the ratio proposed during the split. Second, as the number of shares outstanding increases, the stock price decreases by the same ratio.

If Nvidia’s 10-for-1 split were to go into effect today, everyone who owns Nvidia stock would receive nine additional shares for every share they own. But at the same time, your average cost per share would be reduced by a factor of 10.

Since the number of shares and the stock price vary in the same ratio, Nvidia’s market capitalization theoretically remains unchanged.

However, this is rarely the case. Let’s take a look at Nvidia’s stock split history.

Should You Buy Nvidia Stock Before June 6?

Image source: Getty Images.

Has Nvidia already split its shares?

Nvidia has completed five stock splits since its IPO. The last time Nvidia split its shares was on July 20, 2021.

The chart below illustrates Nvidia stock’s movements 30 days after completing its 4-for-1 split in July 2021.

NVDA ChartNVDA Chart

NVDA Chart

The last time Nvidia split its shares, investors enjoyed a nearly 12% return in just one month after the split. As of the end of December 2021, Nvidia stock was up 58% since the day of its split in July.

Is now a good time to buy Nvidia stock?

Generally speaking, trading activity increases when a company does a stock split. The reason is that even though the split does not in itself change the company’s valuation, the shares are perceived to be cheaper.

In other words, since a split lowers the stock price, many investors think the stock is on sale and take advantage of a cheaper price. This is not the case, and it’s all psychological.

Today, with Nvidia stock trading at over $1,000 per share, it’s likely that many retail investors view the stock as expensive. But keep in mind that even though the price of Nvidia shares after split would be around $100, the charts above highlight that split shares can see outsized momentum. This means that prices can rise sharply over a short period of time and investors are actually buying shares at a very low price. upper valuation compared to pre-split levels.

Since Nvidia’s last split in July 2021, shares are up more than 450%. This abnormally high return has propelled Nvidia to the third most valuable company in the world, just behind Microsoft And Apple.

This is where valuation analysis becomes important. Right now, Nvidia stock is trading at a price-to-free cash flow multiple of 66. That may seem high, even for a growth stock. However, this figure is actually significantly lower than Nvidia’s average over the last three and five years.

Additionally, Nvidia’s closest rival, Advanced microsystems, trades at a price-to-free cash flow ratio of 230x. Given that AMD isn’t seeing growth like Nvidia, I’d say Nvidia stock looks more attractive.

Although Nvidia stock may appear expensive, the analyzes above show that the company is actually trading at a more normalized level than its largest competitor. Additionally, given the historical trends of Nvidia’s latest stock split, I’m pretty confident the stock could see new attention post-split.

For these reasons, I encourage investors to consider purchasing Nvidia stock before June 6. While it may be tempting to trade stocks for a quick profit after the split, the performance over the past few years speaks for itself.

Investors should take a long-term time horizon and allow day traders to enter and exit at the time of the split. Longer-term themes show that buying shares before a split and holding them for several years is the best strategy.

Should you invest $1,000 in Nvidia right now?

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Adam Spatacco holds positions at Apple, Microsoft and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Should you buy Nvidia stock before June 6? was originally published by The Motley Fool

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