Semiconductor company Nvidia (NVDA) announced last Wednesday, along with its first-quarter results, also a 10-for-1 stock split. The stock split means that investors will receive nine additional shares for each share already possessed.
“The split makes sense since the stock price has appreciated so significantly,” says Brian Colello, technology equity strategist at Morningstar.
Nvidia shares have risen more than 90% year to date and more than 200% in the past 12 months, thanks to the key role its chips play in training and running artificial intelligence models. Today the stock trades at over $1,000 per share, while at the end of 2023 its market price was $495. A year ago, in May 2023, the shares were valued at around $305, shortly before the company reported strong results that kicked off the AI stock frenzy.
The last stock split launched by the company dates back to July 2021, when it issued three new shares for each one outstanding (4 for 1).
The date of Nvidia’s stock split
According to the company’s press release, the split will take place on June 7 after the close of trading. The shares will begin trading on a post-split basis starting June 10.
Colello raised his fair value estimate for Nvidia stock from $910 to $1,050 following the company’s first-quarter results. Revenue reached $26 billion, an increase of 18% compared to the previous quarter and 262% compared to the same period last year.
What Nvidia’s stock split implies
While the stock split will increase the number of shares outstanding, it will not change the overall value of the company or influence Morningstar’s opinion on the stock. “The split of shares should not create economic value in theory, but it will make the company more accessible to small investors,” explains Colello. While $500 isn’t enough to buy a single share of Nvidia today, he says, it will be enough to buy several shares after the split.
After the split, Nvidia’s fair value estimate will be changed to $105. The company’s Moat rating, equal to Large, will remain unchanged, as will the 3-star Morningstar rating (which indicates that the stock is trading at prices in line with fair value) and the Uncertainty rating, equal to Very High .
The boom of artificial intelligence
First-quarter earnings show that the company “remains the clear winner in the race to build generative AI capabilities,” Colello writes. “We are encouraged by management’s commentary that demand for its upcoming Blackwell products is expected to outstrip supply through 2025, and we see no signs of slowing demand in the AI market.”
Colello expects strong revenue growth from data centers in the coming quarters and expects further growth from a larger installed base of AI equipment. It expects revenue of $29.7 billion in the next quarter, slightly higher than Nvidia’s estimates.
At least for the moment, Colello doesn’t believe that the rush of companies to buy Nvidia chips will end. According to the expert, Nvidia’s production is still well matched to customer requests, although the risk must be kept an eye on. “Given Nvidia’s astronomical growth, we continue to assess the risk that companies will purchase too many AI GPUs too soon, resulting in overstocking in the future. However, we see no such signs today,” Colello adds.
Why do companies split shares?
When a company carries out a stock split, each share is divided into multiple shares. This increases the number of securities outstanding, but does not change the overall value of the company (its market capitalization). Companies tend to do this when the price of their shares rises to a level that makes it difficult for individual investors to buy. Having more low-cost stocks available to attract more buyers can help improve liquidity; Additionally, lower prices can have the psychological impact of making stocks appear more attractive to investors, even if the underlying value of the company doesn’t change.
Other recent stock splits
Nvidia is not the only large American company to have carried out a stock split in recent years. Retail giant Walmart (WMT) executed a 3-for-1 split in February, while Alphabet (GOOGL/GOOG), Tesla (TSLA) and Amazon (AMZN) have launched a split in 2022.
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