Tomorrow(June 7, 2024), Nvidia (NVDA -1.18%) is set to undertake a significant financial maneuver—a 10-for-1 stock split, following a period of remarkable price escalation. The decision arrives amidst a surge in Nvidia’s stock value, boasting a return of 205% over the past year and a staggering 580% over the last three years, largely propelled by the burgeoning excitement surrounding artificial intelligence (AI).
What exactly does this split signify for investors? Essentially, for every existing share held, shareholders will receive an additional nine shares. Consequently, trading of Nvidia’s stock will commence on a split-adjusted basis starting Monday, June 10. It’s crucial to note that this action neither alters the company’s overall value nor diminishes an investor’s ownership stake in Nvidia.
The pressing question on investors’ minds is: What trajectory will Nvidia’s stock take post-split? While definitive predictions remain elusive, insights can be gleaned from Nvidia’s historical performance subsequent to previous stock splits.
A Historical Precedent of Post-Split Decline
Since its IPO in 1999, Nvidia has undergone five stock splits. Following each split, the company’s shares have typically experienced a downturn, often quite pronounced, in the ensuing 12 to 24 months. As depicted in the accompanying chart, the average decline during the 12-month period following past splits stands at 23%, with the stock still registering an average decrease of 3% after 24 months. In essence, historical data suggests that Nvidia is poised for a substantial and protracted decline.
However, a significant caveat accompanies this observation: Four out of the five previous stock splits coincided with periods of economic recession. Specifically, the U.S. weathered recessions from March 2001 through November 2001 and from December 2007 through June 2009. These economic downturns precipitated bear markets, inflicting severe repercussions on the stock market, thereby naturally affecting Nvidia’s performance.
Despite the initial decline in share value, investors who acquired Nvidia shares during previous stock splits have still realized impressive gains over time, as illustrated in the provided chart.
Future Performance Hinges on Revenue and Earnings Growth
Looking ahead, Nvidia’s trajectory will be heavily influenced by its capacity to bolster revenue and earnings, providing ample grounds for investor optimism.
Nvidia’s Pivotal Role in the AI Landscape
The bullish outlook for Nvidia is underpinned by its pivotal role in the artificial intelligence (AI) ecosystem. Nvidia’s graphics processing units (GPUs) have emerged as the standard-bearers in accelerated computing—a field that marries specialized hardware and software to expedite demanding data center workloads, particularly AI applications. A recent report by the Wall Street Journal underscores Nvidia’s dominance, attributing the company with a market share exceeding 80% in advanced AI systems.
Leveraging its dominance in the GPU market, Nvidia has diversified into various data center product categories, including central processing units (CPUs) and networking equipment, alongside offering subscription software and cloud services. CEO Jensen Huang views this evolution as a strategic advantage, highlighting Nvidia’s comprehensive involvement in building and optimizing entire data centers.
Nvidia’s Strong Financial Performance
Nvidia’s financial prowess is evidenced by a series of impressive financial reports, showcased in the accompanying chart. This positive trend persisted in the first quarter, with revenue soaring by 262% to $26 billion, buoyed by robust data center sales driven by AI product demand. Moreover, gross margin witnessed a notable expansion of 12 percentage points, while non-GAAP (generally accepted accounting principles) net income surged by 462% to $15.2 billion.
