Stock Split Watch: Is Nvidia Next?

Stock Split Watch: Is Nvidia Next?

Ahead of Chipotle Mexican GrillWith the 50-for-1 stock split planned, investors may be wondering which stock could be next.

A candidate is Nvidia (NASDAQ:NVDA), whose stock has soared 230% over the past year and now hovers around $950 per share. So let’s take a look at why a company might split its stock, Nvidia’s history of stock splits, and whether investors should buy the chipmaker.

What is a stock split?

A stock split is a corporate action in which a company divides its existing shares into several shares, thereby increasing the outstanding shares while maintaining the same market capitalization. This results in its shareholders receiving more shares, while their stake and the total value of their investment remains unchanged.

For example, if an investor owns five shares of a company priced at $1,000 per share and the company does a 10-for-1 stock split, then the investor would own 50 shares priced at $100 each, the total value of the investment remaining at $5,000. .

Why would a company split its shares?

While many brokerages allow retail investors to purchase fractional shares, others, like Vanguard, do not offer this option. So when a stock like Nvidia trades at a high price, it may become too expensive for many potential investors. A lower stock price could make a stock more affordable, which could lead to increased demand for the company’s shares, which could increase its overall market capitalization.

Another benefit is that a lower stock price can help attract and retain talented workers. Nvidia co-founder, chairman and CEO Jensen Huang supports this reasoning, saying it gives workers greater flexibility in their ownership of company stock through compensation or stock plans .

Nvidia has already split its shares

Nvidia is no stranger to stock splits. Since its IPO in 1999, it has split its shares five times, all under Huang’s leadership. The company’s most recent, a 4-for-1 split, took place in July 2021.

Notably, when the company announced its latest stock split, its shares were trading at nearly $600 per share, well below its current price of $950 per share.

When Jim Cramer asked him about it in March, Huang replied, “We’ll think about it” and reiterated why he likes the practice, saying, “It’s a good thing.” We want to make sure we take care of our employees.

Is Nvidia a Buy Before a Potential Stock Split?

Although stock splits may attract interest, investors are advised to refrain from basing their investment decisions solely on this factor. Instead, the company’s financial performance and management’s direction have a much greater influence on long-term stock performance.

In Nvidia’s fiscal 2024, the company generated $60.9 billion in revenue and $29.8 billion in net income, an improvement of 126% and 581%, respectively, from its fiscal year. 2023. The meteoric rises were largely driven by growing demand for its expensive H100. chip, which is driving the boom in generative artificial intelligence.

Huang summed up the unprecedented exercise by saying in the company’s fourth-quarter earnings release: “Accelerated computing and generative AI have reached a tipping point. Demand is increasing around the world, across companies, sectors and countries. »

Nvidia management has forecast revenue of around $24 billion for the first quarter of fiscal 2025, which would represent a 234% year-over-year increase. Additionally, management expects its generally accepted accounting principles (GAAP) gross margin to be between 76.3% and 77%, resulting in a significant year-over-year increase from 64.6%. %. Anytime a company can increase its gross margin, it’s displaying its pricing power, which Nvidia has in its industry-leading chips.

No matter how fast a company is growing, investors should always pay attention to valuation to ensure they aren’t paying too much for its shares. For a mature company like Nvidia, the price-to-earnings (P/E) ratio is a standard valuation metric that compares a company’s stock price to its earnings over the past 12 months. As of this writing, Nvidia trades at 79.3 times current earnings, which is higher than its five-year median of 71.9. However, if you look at Nvidia’s forward P/E ratio, which compares the stock price to the company’s expected earnings over the next 12 months, its stock is trading at a more reasonable 37.6.

Stock Split Watch: Is Nvidia Next?

NVDA PE Ratio Chart

Although value investors may scoff at Nvidia’s valuation, given the company’s average current P/E ratio, S&P500 represents 23.2 times earnings, it’s important to highlight the unprecedented growth Nvidia has seen in both revenue and net profit over the past year. For these reasons, coupled with the continued growth of generative artificial intelligence, long-term growth investors should consider buying or acquiring Nvidia. Investors can always implement a dollar-cost averaging strategy to build a position over time without the stress of short-term volatility.

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

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Colin Brantmeyer holds positions in Chipotle Mexican Grill and Nvidia. The Motley Fool ranks and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool has a disclosure policy.

Stock Split Watch: Is Nvidia Next? was originally published by The Motley Fool

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