Is NVIDIA Stock a Buy Before Its Stock Split?
On May 26, when the company announced its first quarter results, NVIDIA (NASDAQ: NVDA) also detailed plans to initiate a 4-for-1 split on July 19. The stock has since climbed more than 21% following the announcement.
Many investors are now asking the question: Is the stock a buy ahead of its highly anticipated stock split next month? As more investors will be able to afford NVIDIA shares, it stands to reason that there could be an increase in demand. In addition, shareholders have just approved an increase in the total number of authorized shares from 2 billion to 4 million, which will also improve liquidity, since the shares can be bought and sold at a more reasonable price.
While NVIDIA stocks certainly look attractive today, the upcoming stock split isn’t the reason investors should be taking on stocks.
Understanding the NVIDIA 4-for-1 Stock Split
The next stock split will be NVIDIA’s fifth since its IPO. The tech giant split its shares on a 2-to-1 basis in 2000, 2001 and 2006. The company then split its shares on a 3-to-2 basis in 2007. Its split in 2021 will take place on a 4 to 1, which means investors will receive four shares for every share they own. The price of the existing shares will be divided by four. For example, instead of owning just one stock – which currently trades at around $ 760 – after the split, investors will own four stocks at a price of $ 190 each.
NVIDIA’s 2021 4-for-1 stock split is scheduled to take place on July 20.
What is the reason for the stock split? NVIDIA said the board of directors declared the stock division “to make share ownership more accessible to investors and employees.”
A suitable opportunity?
At first glance, it may appear that NVIDIA stock is a buy due to the upcoming stock split, but it doesn’t stand up to closer scrutiny. For example, if an investor owns 10 NVIDIA shares and each share is worth $ 760 pre-split, those 10 shares are worth a total of $ 7600. After the split, that same investor will own 40 shares worth $ 190 each, with a total value of $ 7,600 as well, illustrating that the total value of their holdings will ultimately not change.
Also, even if there is greater demand for the stock due to the decline in the stock price after the split, it will likely be a temporary phenomenon. Other investors with a shorter time horizon may simply sell their stocks to capitalize on any irrational increase in the stock price, with the goal of making quick money.
Finally, there is simply no way of knowing what the news cycle might bring on any given day. Investors cannot know how NVIDIA shares will trade by the day of the stock split. The impact of broader market trends, the overall economic picture, or some company-specific news could move the stock much more – up or down – than any anticipation for the next stock split.
In summary, investors should never buy shares in a company simply because it has initiated a stock split.
the real reason to buy NVIDIA stock
Despite all of this, there are plenty of reasons why NVIDIA stock is a compelling buy right now – although that has nothing to do with the upcoming split. Rather, it is NVIDIA’s impressive results and the significant and growing opportunities ahead that make it a timely opportunity.
NVIDIA’s first-quarter revenue grew 84% year-over-year and its earnings per share jumped 106%. To give that background, NVIDIA’s $ 5.66 billion in revenue far exceeded the $ 5.3 billion it was targeting. Gaming segment revenue jumped 106% due to strong demand for the company’s advanced graphics processing units (GPUs) used by gamers. At the same time, its data center revenues grew 79% year-over-year, which is a growing trend for NVIDIA’s advanced processors used for cloud computing, data centers and artificial intelligence (AI).
“We’ve had a fantastic quarter, with strong demand for our products generating record revenues,” said Jensen Huang, Founder and CEO of NVIDIA.
Given the company’s impressive growth and the acceleration of the centuries-old tailwinds for gaming, cloud computing and AI, there are many reasons to be optimistic for NVIDIA. The company’s solid business – not its upcoming stock split – is what makes NVIDIA an attractive stock to own for long-term investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.