Nvidia stock has soared almost 600% over the past three years.
Nvidia (NVDA -0.71%) just made a move that many investors were eagerly waiting for: The tech giant completed a stock split, significantly bringing down its stock price. Nvidia shares had soared in recent times, climbing nearly 600% in just three years. That's as the company once known mainly for serving gaming customers with its chips surged to the forefront in the world of artificial intelligence (AI).
Nvidia designs and sells the world's most powerful graphics processing units (GPUs), and customers launching AI programs have been rushing to get their hands on them -- and on other Nvidia products and services tailored to AI projects. As a result, Nvidia's earnings have been climbing in the triple digits in recent quarters -- and investors have flocked to buy the shares.
The company announced its stock split during its most recent earnings report, launched the operation last week, and the shares began trading at their new price at the start of trading this week. Here are three things to know about the split and what it means for Nvidia and investors.
Image source: Getty Images.
1. Nvidia stock isn't cheaper than it was before.
Nvidia stock, at the split-adjusted price, now is trading for about $120 a share compared with more than $1,200 last week. The company completed a 10-for-1 stock split, offering more shares to current holders to bring each individual share down to a tenth of the former price.
This is a positive move because it makes the stock more accessible for a broader range of investors -- Nvidia even said this was its motive for the split, to make it easier for employees and shareholders to invest. So, today, you don't have to shell out more than $1,000 or buy fractional shares to open a position in Nvidia or add a small amount to your existing position.
But this doesn't make Nvidia cheaper than it was prior to the split. The stock still is trading for 44x forward earnings estimates, to use one valuation measure as an example. This is because the split acts on individual share price through the issuance of more shares, but it doesn't change anything fundamental about the particular company and stock. The market value of the company and the value of an investor's holding remain unchanged.
2. The shares made this surprising move after the past three stock splits.
Because stock splits are just mechanical moves, they don't act as catalysts for stock movement. So, a stock won't rise or fall just because the company completed this sort of operation. But it is interesting to look back at how Nvidia shares performed following past stock splits. The previous three were in 2006, 2007, and 2021.
And in each case, the shares declined or stagnated in the months following the stock split.
Does this mean the same thing will happen this time around? Not necessarily. It's important to consider the economic context or other factors that may have contributed to the stock's performance. For example, the 2006 Nvidia operation happened in the spring -- and in the summer there's often less activity in the market, meaning fewer catalysts to boost the stock. And in 2007, the general market was heading into bear territory.
Finally, during all three occasions Nvidia's earnings picture was different from its earnings picture today. Then, the gaming industry was a key customer -- today, the main customers are in the high-growth area of AI.
It's possible Nvidia shares may trend lower during the slower summer months or in the absence of major news ahead of the company's Blackwell architecture and chip launch later this year -- but this or any other movement isn't due to the stock split.
3. The stock split shows how Nvidia feels about the future.
Companies generally launch stock splits after periods of success. Earnings have been on the rise, and that's pushed shares higher too. In the case of many recent stock splits – especially in the tech industry -- the particular stock has reached prices that put it out of reach for many investors. By this I mean the level of $1,000, which may be a psychological barrier for some investors. For example, Amazon launched a split in 2022 after its shares soared above $3,000.
So, when a company announces a split, that company usually has been doing pretty well when it comes to earnings and share performance. But the announcement also suggests the company, in this case Nvidia, could continue to excel. Management is optimistic that the stock, from its new price, has what it takes to again climb significantly higher.
And a lower per-share price offers it room to run -- because more investors are able to more easily buy the stock.
What does this mean for Nvidia and for you?
These are positive times for Nvidia, and considering the high demand for AI products and services, these good times could keep on rolling for the long term. The stock split didn't change any of this -- but it did make it easier for certain investors to get in on the Nvidia story. And that's positive.
I considered Nvidia stock a buy prior to the stock split, and my view hasn't changed. Whether the stock continues to soar or dips as it did following previous stock splits, that's OK. Nvidia has the innovation and market leadership to keep earnings advancing -- and that should power this stock higher over the long run.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
