Nvidia has split its stock five times in the past, with its share price dropping significantly afterwards.
Nvidia (NVDA 5.16%) will complete a 10-for-1 stock split after the market closes tomorrow. The split comes on the heels of a big share price rally: Nvidia has gained 205% over the past year and 580% over the past three, driven in large part by enthusiasm for artificial intelligence.
What does the stock split mean for investors? Shareholders will receive 9 additional shares for each share they own. The shares will start trading at the split-adjusted price starting Monday, June 10th. Importantly, the stock split does not affect the value of the company, nor does it change investors’ stake in the company.
The big question is what will happen after the stock split. Of course, there’s no way to know for sure, but we can make a guess by looking at how Nvidia has performed after past stock splits.
History suggests Nvidia’s stock is headed for a steep decline
Nvidia has split its stock five times since its IPO in 1999. As the chart shows, after these splits, the stock price typically fell (often significantly) over the following 12 and 24 months.
Stock split date
Types of stock splits
Returns (after 12 months)
Returns (after 24 months)
July 20, 2021
4 to 1
(Four%)
145%
September 11, 2007
3 vs 2
(70%)
(53%)
April 7, 2006
2 vs 1
1%
(6%)
September 12, 2001
2 vs 1
(72%)
(49%)
June 27, 2000
2 vs 1
28%
(52%)
average
(twenty three%)
(3%)
Data source: YCharts.
As you can see, Nvidia’s stock price has fallen an average of 23% in the 12 months following past stock splits, and 3% after 24 months. In other words, historically Nvidia has been headed for a steep, long-term decline.
However, this statement raises a big question mark: four of the last five stock splits have occurred just before economic recessions. Specifically, the U.S. economy was in recession from March 2001 to November 2001, and from December 2007 to June 2009. These economic downturns led to bear markets that had a devastating effect on the stock market, so naturally Nvidia’s stock price fell.
The bottom line is that even though the stock price initially fell, investors who bought shares during the past stock splits still saw very nice gains. See the chart for more details.
Stock split date
Types of stock splits
Returns (post stock split)
July 20, 2021
4 to 1
527%
September 11, 2007
3 vs 2
14,580%
April 7, 2006
2 vs 1
24,840%
September 12, 2001
2 vs 1
40,100%
June 27, 2000
2 vs 1
42,650%
Data source: YCharts.
Going forward, Nvidia’s performance will depend mainly on its ability to grow revenue and profits, and investors have plenty of reason to be bullish.
Nvidia is the market leader in artificial intelligence chips
Nvidia’s bullish outlook is based on the company’s key position in the artificial intelligence (AI) economy. Nvidia’s graphics processing units (GPUs) are the standard in accelerated computing, a field that combines specialized hardware and software to accelerate demanding data center workloads such as AI applications. In fact, The Wall Street Journal recently reported that “Nvidia’s chips power all the most advanced AI systems, and the company’s market share is estimated to be more than 80%.”
NVIDIA’s dominance in the GPU market has allowed it to expand into data center-related products, including central processing units (CPUs), networking equipment, subscription software and cloud services. CEO Jensen Huang sees this evolution as a key competitive advantage. “We literally build entire data centers,” he told analysts. “That deep knowledge of the scale of entire data centers is our fundamental strength today.”
As the chart shows, NVIDIA has been delivering some truly impressive financial results, and the trend continued in the first quarter, with revenue growing 262% to $26 billion on strong data center sales driven by demand for AI products, while gross profit increased 12 percentage points and non-GAAP (generally accepted accounting principles) net income increased 462% to $15.2 billion.
Nvidia has seen its revenue and non-GAAP net income grow at triple-digit rates for the fourth consecutive quarter.
Going forward, it’s inevitable that Nvidia will lose steam at some point, but the company will have a strong tailwind in the coming years: Spending on artificial intelligence hardware, software and services is projected to grow 36.6% annually through 2030, according to Grand View Research.
Somewhat surprisingly, Nvidia’s stock is trading at a discount to its historical valuation.
Some investors might worry that Nvidia is overvalued, as its stock price has tripled over the past year. But earnings have actually been growing faster — recall that first-quarter non-GAAP net income grew 462% — meaning its price-to-earnings multiple is declining.
Additionally, Wall Street expects Nvidia to grow its earnings per share at 38% annually over the next three to five years, and the company’s stock is currently trading at 70 times earnings. This gives it a PEG ratio of 1.8, which is significantly cheaper than its three-year average of 3.2. This means that Nvidia’s stock is trading at a discount to average, despite its incredible stock price appreciation over the past year.
Finally, to quote Morgan Stanley analyst Joseph Moore: “Ultimately, we believe that AI exposure will remain in the background even as enthusiasm grows. And the most obvious way to gain that exposure remains Nvidia.”
