A look at Nvidia’s past stock splits can provide some clues.
NVIDIA (NVDA -0.15%) The stock has soared over the past five years, soaring to over $1,000 in early 2024. This comes as the company has built a dominance in the artificial intelligence (AI) chip market and delivered triple-digit revenue and profit growth every quarter.
A stock price of around $1,000 isn’t necessarily affordable for all investors, and recognizing this, Nividia implemented a stock split in early June.
Stock splits lower the price per share of a company’s stock by issuing additional shares to current shareholders. These measures don’t actually make the stock cheaper, however, because they don’t fundamentally change the company. However, the lower price could attract investors who weren’t ready to pay more than a few hundred dollars before the split.
As we approach the third month since the split, it’s reasonable to take a look back at how Nvidia has performed so far and consider whether this stock market darling will continue to rise. Let’s look to history for clues.
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NVIDIA stock split
The company announced plans to split its stock in May when its shares were trading above $900. After the announcement, the stock quickly rose above $1,000. From the date of the announcement until the stock split on June 7, the stock price rose nearly 30%. Due to the 1-for-10 split ratio, the stock price on June 10 started the month at around $120.
Since then, Nvidia shares have seen some ups and downs, but overall are down about 4% — a far cry from the typical Nvidia performance we’ve seen earlier this year and throughout 2023.
Where is Nvidia’s stock headed from here? In two of the last three Nvidia stock splits, the stock price rose double digits in the first three months after the split and then the next two months. However, in the other split, the stock price fell double digits during that period.
To cite a historical example, Nvidia’s performance in the months following its stock split has been mixed but leaning positively.
Now, let’s consider the broader data on stock splits. According to a Statista report using data from Bank of America’s Research Investment Committee, in studies from 1980 to today, overall, companies that have split their stock have outperformed the S&P 500. The data shows that stocks that have split their stock have posted an average total return of over 25% in the 12 months following the announcement, which is double the average return of the S&P 500 during that period.
Possibility of stock price increase
Why does this happen? The idea is that by lowering the stock price, more investors will flock to the stock, causing the price to rise. While this may be partially true, it’s not the only factor investors look at. Investors don’t buy a stock just because it has completed a stock split.
In Nvidia’s case, investors have started to worry about increased competition in the AI chip market, and concerns about the economy in general are also taking hold. Economic uncertainty in general weighs on high-growth companies like Nvidia, as they rely on strong economic conditions to support their businesses. These factors, along with profit-taking, have led to Nvidia’s recent sluggish performance.
Looking forward, history tells us that Nvidia is likely to rise in the coming months if the stock follows historical patterns. However, history doesn’t always repeat itself, so I wouldn’t buy Nvidia today for a quick profit. The good news, however, is that Nvidia has plenty of headroom to make profits over the long term.
The company is about to unveil its new Blackwell architecture and its most powerful chips ever, and has pledged to refresh the chips annually, which should keep revenue soaring. Of course, some customers will choose cheaper chips from rivals, or use Nvidia’s chips alongside rival chips. But the biggest AI players generally want the best and fastest chips to power their projects, so we don’t expect this to cut into Nvidia’s market share much.
All of this means that whether history holds true about Nvidia’s future performance, you could be well on your way to profiting from buying shares in the semiconductor giant today and holding for the long term.
Bank of America is an advertising partner of The Ascent, a Motley Fool. Adria Cimino does not own any of the stocks mentioned. The Motley Fool owns shares of and recommends Bank of America and NVIDIA. The Motley Fool has a disclosure policy.
