Why Is Everyone Talking About Nvidia’s Stock Split?

Artificial intelligence (AI) chip demand is driving Nvidia's growth. Read More...

Artificial intelligence (AI) chip demand is driving Nvidia’s growth.

Nvidia‘s (NVDA -0.09%) stock split may be one of the most talked-about subjects on the planet right now. At least when it comes to financial news. The artificial intelligence (AI) chip giant announced the operation during its earnings report last month and completed it on June 7. And today Nvidia shares start trading at their split-adjusted price.

This operation was eagerly anticipated, with investors wondering about a possible split over the past year as Nvidia stock roared higher. When the company finally spoke of its plans, Nvidia stock, trading at around $950, raced past $1,000. So, it’s clear there’s a lot of excitement surrounding this move by Nvidia — even though stock splits aren’t known to boost stock performance. So why is everyone talking about Nvidia’s stock split? Let’s find out.

An investor smiles while talking on the phone.

Image source: Getty Images.

The details of a stock split

First, a quick note about stock splits in general. These operations involve the issuance of additional shares to current holders, but they don’t change the market value of the company or the value of an investor’s holding. They just lower the price of each individual share.

The ratio of the split determines the price, and in the case of Nvidia, we’re looking at a 10-for-1 split. So, if you owned one share of the company last week, you now own a total of 10 shares at the post-split price. Considering the price of Nvidia’s stock last week, the new price should be around $122 per share.

Since, as I mentioned above, stock splits are purely mechanical moves and don’t change anything about the fundamentals of a company, they don’t act as catalysts for share price performance. But there still are two reasons to be excited about Nvidia’s move — and they are the reasons this Nvidia stock split is in the spotlight right now.

First, this move, by lowering the price of each individual share, opens the stock up to a broader range of investors. Nvidia even said that its motive for launching the split was to make it easier for employees and investors to buy the stock.

The level of $1,000 a share may represent a psychological barrier for some investors — and even if the stock is cheap from a valuation standpoint, they may hesitate to buy. In other cases, an investor may use a brokerage that doesn’t offer fractional shares, and the price of $900 or $1,000 for one share might be beyond that investor’s budget.

But these problems disappear with the launch of a stock split, bringing the price of each share down to a level more people can access. This is positive for the company and for investors who want to open a small position in Nvidia.

A sign of confidence from Nvidia

The second reason investors are cheering about Nvidia’s split is it’s a sign of confidence from the company about its future. A company that makes a good candidate for a stock split usually has done well in the past. The company’s shares have climbed to a high level and generally there’s a good reason for that, such as earnings growth.

If this particular player actually decides to split its stock, it shows the company believes more growth lies ahead. Nvidia likely has confidence its stock can go on to advance to high levels again, and importantly, demand for the company’s AI products and services supports this idea. Nvidia has reported quarter after quarter of triple-digit revenue gains, with revenue reaching record levels. In the most recent quarter, revenue soared to $26 billion. Nvidia says demand for its chips and platforms exceeds supply, and it expects this to continue even as the company says it’s constantly “racing” to serve these multiplying orders.

All this means there’s reason to join Nvidia in its confidence about earnings growth — and potentially share performance — moving forward.

So, yes, a stock split in itself is just a mechanical move. But this decision still is a positive signal for Nvidia and for shareholders, and that’s why everyone is talking about it.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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