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Nvidia May Be an Exciting Stock, but Its 10-for-1 Stock Split — Like Most Stock Splits — Is a Nothing Burger

In Business
June 09, 2024

If you don’t know a lot about the semiconductor giant Nvidia (NASDAQ: NVDA), it’s worth learning, because the company has been a huge success lately in the field of artificial intelligence (AI). Nvidia is often in the news, and most recently that’s due to a 10-for-1 stock split, which got many investors excited.

But most stock splits — including this one — are not as exciting as they may seem. Before we tackle stock splits, let’s agree that Nvidia, the company, is exciting. Its stock performance certainly is:

Period

Average Annual Stock Gain

Past 1 year

192%

Past 3 years

89%

Past 5 years

103%

Past 10 years

73%

Past 15 years

50%

Data source: Morningstar.com, as of June 3, 2024.

Those are eye-popping numbers. A 50% annual return will increase an investment more than 437-fold over 15 years! If you only owned Nvidia over the past five years, your stake would have doubled in value each year, on average.

Nvidia’s stock performance is exciting because the underlying business is exciting. Over the years, Nvidia grew from a specialist in gaming chips to one that’s now getting most of its revenue from its data center technology. That’s due to the soaring prevalence of artificial intelligence (AI), which is requiring more and more semiconductor firepower.

Check out some additional exciting numbers from Nvidia:

Year

Total revenue, in billions

2024

$60.9

2023

$27.0

2022

$27.9

2021

$16.7

2020

$10.9

2019

$11.7

2018

$9.7

2017

$6.9

2016

$5.0

Data source: Morningstar.com.

In the first quarter of Nvidia’s fiscal 2025, revenue was up a stunning 262% year over year! And total revenue for the trailing 12 months is nearly $80 billion as artificial intelligence fuels further data center growth. (Indeed, AI may even fuel further growth in Nvidia’s gaming business.)

Nvidia’s stock split is not so exciting

Despite legitimate enthusiasm over Nvidia and its stock, excitement over its 10-for-1 stock split (which occurred on June 7) is misplaced. Shares have surged more than 20% as of June 3 since the company announced impressive first-quarter results and the stock split on May 22.

What’s a stock split?

Stock splits increase the number of shares while decreasing the value of each share, proportionately. A common split formula is 2-for-1, where you end up with two shares for each you owned pre-split, and the share price is halved. But let’s see what happens with Nvidia’s split.

Imagine that you own 10 shares of Nvidia pre-split, at a price of, say $1,160 per share. The total value of your shares is $11,600. When the shares split, you’ll end up with 100 shares. But the share price will suddenly be roughly a tenth of what it was — so around $116 apiece. Multiply your 100 shares by the $116 price and you’ll get a total value of $11,600.

Stock splits are mostly an accounting event, and for most investors, a nothing burger. In some cases, though, like this one, the split can bring the share price to a level that works for more investors. Pre-split, with Nvidia shares above $1,100, many people might have assumed they couldn’t afford a single share.

What’s a reverse stock split?

It’s worth noting that reverse stock splits also exist, and they’re a bit more meaningful, since they’re typically executed by companies that are struggling. A reverse split will prop up a stock’s price, which can help it avoid getting delisted from a stock exchange and can help it look less like a risky penny stock.

If Nvidia executed a 1-for-10 reverse split, your 10 shares would become one share, worth about 10 times what the shares traded for pre-split. Again, the total value doesn’t change.

Should you buy shares of Nvidia?

Stock splits aside, what most people are probably wondering about Nvidia is: Is it too late to buy shares now?

There’s no answer to that question that would suit everyone, and opinions will usually differ on the valuation of any stock. Plenty of people see Nvidia’s shares as overvalued at recent levels, and that’s fair. Its recent price-to-sales ratio of 36, for example, is well above its five-year average of 19.

But it’s also reasonable to see the seemingly steep valuation as not so outrageous given how rapidly the business is growing. (Note that it has been viewed as overvalued for years.)

So learn more about the company and crunch the numbers for yourself. If you’re planning to buy and hold for many years, buying now could turn out to be a smart move. Even if there’s a pullback in the near future, the company has a lot of long-term growth potential. If you’re risk averse, though, or fear volatility, look elsewhere.

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

Before you buy stock in Nvidia, consider this:

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Selena Maranjian has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

Nvidia May Be an Exciting Stock, but Its 10-for-1 Stock Split — Like Most Stock Splits — Is a Nothing Burger was originally published by The Motley Fool

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