Nvidia (NASDAQ: NVDA) dominates the artificial intelligence (AI) chip market, and this has helped earnings to climb in the triple digits in recent years. AI may be the hottest investment theme right now, and this could continue. After all, analysts say the AI market could be worth more than $1 trillion by the end of the decade. So it’s no surprise that Nvidia shares have skyrocketed, advancing 600% over the past three years.
This momentum helped push Nvidia shares to nearly $1,000 in recent times. And they actually surpassed that level after the company announced another blowout quarter, along with a move many investors had been hoping for: a stock split.
This will significantly lower the price of each Nvidia share. The big question is: Should you buy Nvidia stock before the June 7 stock split or wait until you can get shares at the lower price?
Lowering the price of each share
First, let’s talk about stock splits, in general. They don’t change the market value of a company or the value of your holding if you already own the shares. Instead, a stock split will lower the price of each share by offering more shares to current holders. The ratio of the split determines the number of shares each investor will receive.
In the case of Nvidia, it’s a 10-for-1 stock split, so for every one share you hold, you’ll get an extra nine. At today’s price of about $1,139, each individual share will now sell for $113. You’ll have to be a shareholder of record as of June 6 to benefit, and the extra shares will be distributed after the market close on June 7.
Should you get in on Nvidia before or after this much-awaited stock split? The short answer is it doesn’t matter, and here’s why. As mentioned earlier, a stock split doesn’t change the value of the company or the value of an investor’s holding. If you buy one share today or 10 shares after the split, you’ll be investing the same amount of cash.
Also, stock splits themselves aren’t catalysts for share performance since they’re just mechanical movements — so Nvidia shares aren’t likely to soar the day after the split just because a split occurred. Any potential gains, which could come either now or post-split, probably would be linked to the company’s recent earnings performance or future growth prospects.
Opening the door to a broader range of investors
The split is positive for Nvidia because it offers a broader range of investors access to the stock, and the company even stated that as its reason for launching the operation. Yes, fractional shares exist, but certain brokerages don’t offer them, and some investors prefer buying full shares. That doesn’t mean a huge wave of new investors will buy Nvidia shares post-split, but over time, a lower per-share price could attract more investment.
Now let’s get back to you. If you want to bet on a current and future leader in the AI space, Nvidia makes an excellent buy (now or post-split). The company’s graphics processing units (GPUs) are powering the key AI tasks of training and inferencing — and more. And demand for Nvidia’s chips and systems is so high, the company says it’s “racing” to keep up.
Meanwhile, Nvidia is set to release its Blackwell architecture and most powerful chip ever later this year. And the company pledges to update its top-performing chips annually. This will make it very difficult for rivals to unseat this market giant.
Though we all tend to look at a stock price and immediately think “that’s cheap” or “that’s expensive,” it’s important to instead look at valuation, or what the stock really is worth. Today, Nvidia trades at 42x forward earnings estimates, which looks reasonable, considering the company’s market position and growth prospects.
Nvidia makes a great buy and could offer you explosive growth over time — whether you buy the stock before or after the upcoming stock split.
Should you invest $1,000 in Nvidia right now?
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Should You Buy Nvidia Before the June 7 Stock Split? was originally published by The Motley Fool
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