Stock Splits: What You Need to Know about the NVIDIA Stock Split
NVIDIA, a titan in the semiconductor industry known for its cutting-edge graphics processing units (GPUs), made headlines with its stock split announcement. This event, which took place in June 2024, involved a 10-for-1 stock split, a significant decision that has implications for investors, the market, and the company itself.
Understanding Stock Splits
A stock split is a corporate action in which a company divides its existing shares into multiple shares. Although the number of shares increases, the total dollar value of the shares remains the same compared to pre-split amounts, meaning the company's market capitalization is unchanged.
For example, in a 10-for-1 stock split, each shareholder receives nine additional shares for every share they hold, while the price of each share is divided by 10.
The Rationale Behind NVIDIA's Split
Several strategic reasons motivated NVIDIA’s decision to execute a stock split:
1. Enhanced Accessibility: Prior to the split, NVIDIA's stock was trading at a price that might have been prohibitively high for individual investors. By reducing the price per share, the company made its stock more accessible to a broader range of investors, including retail investors who might have been deterred by higher prices.
2. Increased Liquidity: Lower-priced shares often attract more trading activity. This increased liquidity can benefit all shareholders by making it easier to buy and sell shares without causing significant price fluctuations.
3. Market Perception: A stock split can signal confidence in the company's future prospects. It indicates that the company expects continued growth and strong performance, which can enhance investor sentiment and attract new shareholders.
4. Aligning with Peers: Many of NVIDIA’s peers in the tech sector, such as Apple and Tesla, have also executed stock splits. In fact, NVIDIA will be the fourth “Magnificent Seven” stock to split since 2022. By following suit, NVIDIA aligns itself with industry standards, maintaining competitive equity market strategies.
Impact on Investors
For existing shareholders, the immediate effect of the stock split increased the number of their shares ten-fold, with each share’s value adjusting to one-tenth of its previous price.
To use NVIDIA as an example, the price before the split was $1,208.88. When the market opened on June 10th and each share was split into 10 shares, the new share price was $120.88. So, if you owned one share on June 7th, the total value was $1,208.88. On June 10th, you owned 10 shares at $120.88 for a total value of $1,208.88.
The same principle applies to the dividend – the total value of the dividend would be divided evenly among the ten shares. For example, if the dividend on one share was $1.00 before the split, after the split each share would receive 10 cents (for a total value of $1.00).
The split does not alter the overall total value of their holdings or the dividend payout at the date of split.
Market Reaction
The announcement of NVIDIA’s stock split was met with enthusiasm in the marketplace. Historically, stock splits are often followed by a period of positive performance, and NVIDIA’s case was no exception. The stock experienced a run-up leading to the split date, reflecting investor optimism and confidence in the company’s future.
Conclusion
Would we recommend investors buy NVIDIA after the split? As long-term holders and value investors, we reviewed the fundamentals of NVIDIA. While the price is lower due to the split, the fundamental metrics of the company seem inflated. For example, the price-to-earnings ratio of NVIDIA is 71 (the “mean” is typically about 17).
The price of NVIDIA could continue to climb in the short-run, which means anyone who chooses to buy in at this high of a valuation should make a timely sell of the stock somewhere in the near future. At what point the sale is timely is unknown, which makes this move complicated. In the long run, companies tend to revert to the mean so we would expect to see a decline in price at some point in the future.
Overall, NVIDIA’s 10-for-1 stock split in June 2024 was a strategic move designed to enhance stock accessibility, increase liquidity, and signal confidence in the company’s future growth. For investors, the split provided an opportunity to purchase shares at a lower price, potentially leading to increased demand and a broader investor base – but as a whole it is not a stock we would currently recommend buying for conservative, long-term investors.
