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Why is everyone talking about Nvidia’s stock split?
NvidiaThe (NASDAQ: NVDA) stock split might be one of the most talked about topics on the planet right now. At least when it comes to financial news. The artificial intelligence (AI) chip giant announced the transaction during its earnings report last month and completed it on June 7. And today Nvidia shares begin trading at the split-adjusted price.
This transaction was eagerly awaited, with investors wondering about a possible split last year as Nvidia shares soared. When the company finally spoke about its plans, Nvidia shares, trading at around $950, surpassed $1,000. So it’s clear that there’s a lot of excitement surrounding this move by Nvidia – although stock splits aren’t known to improve stock performance. So why is everyone talking about Nvidia’s stock split? Let’s find out.
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 do not change the market value of the company or the value of the investor’s stake. They just lower the price of each individual share.
The split ratio determines the price, and in the case of Nvidia, we are 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 Nvidia’s share price last week, the new price should be around $122 per share.
Since, as I mentioned above, stock splits are purely mechanical movements and do not change anything about a company’s fundamentals, they do not act as catalysts for share price performance. But there are still two reasons to be excited about Nvidia’s move — and they’re why this Nvidia stock split is in the spotlight right now.
Firstly, this measure, by lowering the price of each individual share, opens the shares to a wider range of investors. Nvidia even said that the reason for launching the division was to facilitate the purchase of shares by employees and investors.
The $1,000 per share level may represent a psychological barrier for some investors – and even if the stock is cheap an evaluation point of view, they may hesitate to buy. In other cases, an investor may use a brokerage that does not offer fractional shares, and the price of $900 or $1,000 for a share may be beyond the investor’s budget.
But these problems disappear with the launch of a stock split, reducing the price of each share to a level more accessible to people. This is a positive for the company and for investors looking to open a small position in Nvidia.
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A sign of confidence from Nvidia
The second reason investors are applauding the Nvidia split is that it’s a sign of the company’s confidence about its future. A company that is a good candidate for a stock split has generally performed well in the past. Company shares have risen to a high level and there is usually a good reason for this, such as earnings growth.
If this particular player actually decides to split its shares, it shows that the company believes there is more growth ahead. Nvidia is likely confident that its shares can advance to high levels again, and more importantly, demand for the company’s AI products and services supports this idea. Nvidia reported quarter after quarter 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 expects this to continue, even as the company says it is constantly “racing” to meet these growing orders.
All of this means there’s reason to join Nvidia in its confidence in earnings growth – and potentially stock performance – in the future.
So yes, a stock split itself is just a mechanical movement. But this decision is still a positive sign for Nvidia and shareholders, which is why everyone is talking about it.
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Adriana Cimino has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The motley fool has a disclosure policy.
Why is everyone talking about Nvidia’s stock split? was originally published by The Motley Fool