A number of high-profile companies have initiated stock splits over the past couple of years. The real reasons for the splits vary depending on the company, but some market experts surmise that most splits are primarily driven by the belief that such a move will boost the demand for shares by making the resulting lower per-share price more accessible to a bigger pool of investors.
Most stock splits are nothing more than cosmetic moves. It simply reduces the stock price of a company in direct proportion to the increase in the number of outstanding shares. For example, if you own a stock that's priced at $150 and management decides to execute a 3-for-1 stock split, you'll now have three shares of $50 each.
The fundamentals of the companies executing the split generally don't change during such an event, though it is worth noting that stock splits tend to give the share prices a short-term bounce on account of increased demand driven by a more affordable price. This is exactly what Nvidia (NVDA -3.00%) investors experienced a couple of years ago after management announced a 4-for-1 stock split in May 2021.
Nvidia's stock price spiked after the split. But the price spike could be attributed as much to the company clocking terrific growth at that time thanks to the healthy demand for its gaming graphics cards from the personal computer (PC) market. With shares of Nvidia having more than doubled (gaining 124%) since its previous split was executed on July 20, 2021, can investors expect Nvidia management to split the stock once again, as it is trading at a lofty $416 a share now? Let's find out.
Why a stock split looks likely
Nvidia has executed five stock splits in its history. As the following table shows, management has split Nvidia's stock price four times between 2000 and 2007:
|
Date |
Stock-split ratio |
|---|---|
|
July 20, 2021 |
4-for-1 |
|
Sept. 11, 2007 |
3-for-2 |
|
April 7, 2006 |
2-for-1 |
|
Sept. 17, 2001 |
2-for-1 |
|
June 27, 2000 |
2-for-1 |
Source: Yahoo! Finance
When Nvidia announced its last stock split a couple of years ago, management said that the step was being taken to "make stock ownership more accessible to investors and employees." Also, the run of four stock splits within a seven-year period in the 2000s shows that management hasn't been hesitant to take this step in the past to improve the demand for Nvidia stock once it rises sharply. For instance, shares of Nvidia rose a whopping 180% from the beginning of 2006 through the end of 2007.
Given that the stock has jumped a whopping 185% in 2023 already, a potential Nvidia stock split may not be ruled out. Another reason why management may be tempted to go for another stock split is because it may look to spur demand for the company's shares following a terrible September, during which Nvidia's stock price slid over 14%.
However, whether Nvidia decides to split its stock or not (since it is merely a cosmetic move, as discussed earlier), a closer look at the company's prospects and outstanding growth suggests that investors should consider capitalizing on the stock's recent drop to buy more shares. Here's why.
Nvidia remains a solid buy, irrespective of a stock split
Nvidia's solid stock market surge this year was driven by the company's eye-popping growth. The company's graphics cards are being deployed in artificial intelligence (AI) servers, and that's where the majority of the growth is coming from.
In the second quarter of fiscal 2024 (the three months ended July 30, 2023), the data center business produced a record $10.3 billion in revenue, a huge jump of 171% from the year-ago period. This segment now accounts for 76% of the company's overall revenue, and its significant influence on Nvidia's business explains just why its revenue is expected to jump at a greater pace in the current quarter.
Nvidia management forecasts $16 billion in revenue in the ongoing quarter, which would be a bigger year-over-year spike of 170% and points toward an acceleration in the company's growth. What's more, the secular growth opportunity in the data center market, thanks to AI and Nvidia's dominant position over here, explains why the company's revenue is set to take off big time from $27 billion in the previous fiscal year.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts.
Even better, analysts are anticipating Nvidia's earnings to increase at an annual rate of 78% for the next five years. That's why savvy investors would do well to buy the stock following its recent pullback, as it is available at a relatively cheaper price-to-earnings ratio. Also, the forward earnings multiple points toward a big bottom-line jump and is way lower than the trailing multiple.
NVDA PE Ratio data by YCharts.
So, stock split or not, Nvidia looks like a top growth stock to buy right now, considering how fast the company is growing and the fact that it is expected to sustain the same in the future.
