What You Need To Know – Forbes Advisor

Common stock shares in celebrated chipmaker Nvidia (NVDA)—whose graphics processing units, or GPUs, are widely used in gaming, cryptocurrency mining, vehicles, robotics and now artificial intelligence—have returned more than 15% since May 21, the day before Nvidia announced a whopping 10-for-1 stock split, which is set for June 7.

Nvidia shares have been uptrending since well before the company’s split declaration, however, skyrocketing about 27% in the past month, as well as roughly 121% since the start of this year.

The question on many investors’ minds is: Will the coming NVDA stock split be good for Nvidia shareholders?

Buy Nvidia Now, or Buy Later?

Nvidia’s stock split means you get nine additional shares for each share of Nvidia common stock you own at the market’s close on Friday, June 7. So NVDA investors have until then to decide what they want to do. Nvidia’s share price keeps uptrending—which means any delay in buying could be costly.

Whichever path investors choose, the split shares will be dished out after the close of the stock market on June 7.

Trading is scheduled to begin on a split-adjusted basis when the market opens on Monday, June 10.

Why Nvidia Is Splitting Its Shares

Nvidia is splitting its stock “to make stock ownership more accessible to employees and investors,” the company said in its first-quarter earnings announcement.

“Companies split their shares because they want investors to perceive them as more affordable with [investors having] the ability to buy more shares,” says Paul Schatz, president of Heritage Capital and treasurer of the National Association of Active Investment Managers.

A split does not change either a company’s market capitalization or value. If shares of a company sold for, say, $1,000 each before a 10-for-1 split, afterward they sell for $100.

One thing that does change is a company’s number of outstanding shares. In the case of a 10-for-1 split, the number of shares outstanding increases 10-fold.

Still, perception can differ from reality. “There are two psychological factors at work,” says Ric Edelman, financial advisor, bestselling author and board member of Edelman Financial Engines. “The first … is that the price is perceived to be more ‘affordable’ and thus of greater interest.”

“The second,” Edelman says, “which is more important and a more powerful motivator for investors, is that the new low price is perceived [to be] cheaper than the pre-split price, and investors view this as an opportunity to buy the shares ‘on sale’ with the expectation that the price will return to its pre-split level. This notion makes no sense logically, but every study done on the topic shows that investors don’t act rationally.”

Is a Split Stock a Good Buy?

Similarly, traders often feast on stocks post-split because they think the stock is ripe for a run-up due to its new, lower price.

“Many traders take advantage of this known bias in an effort to capitalize on the foolishness of other investors,” Edelman says.

In the past, many traders bought shares after a split because they believed stocks tended to rise toward the pre-split price within a year.

“But it doesn’t always work, of course,” Edelman says. “On Wall Street, nothing ‘always’ works.”

Likewise, some investors believe that a stock split is a bullish sign that reflects a rising stock’s positive momentum in the marketplace. Similarly, a reverse split is viewed by some investors as a sign that a company expects its growth to falter and its stock will lose value.

“It’s ironic: While investors irrationally believe that splits are bullish for price increases, they do not believe that reverse splits are bad. This inconsistency cannot be explained rationally,” Edelman says.

What’s Next for Nvidia Stock?

Nvidia stock cracked through the $1,000 per share level two days after the split disclosure. That continued an uptrend which began April 19.

Earnings may not be directly connected to a split. But rising earnings do tend to lift stock prices. In Nvidia’s case, growing demand for chips that can deliver AI-capable devices in particular has rocketed Nvidia’s earnings aloft.

In an earnings call, Nvidia founder and chief executive Jensen Huang said, “The next industrial revolution has begun.”

In the same call, Huang also said, “Companies and countries are partnering with Nvidia to… build a new type of data center—AI factories—to produce a new commodity: artificial intelligence. AI will bring significant productivity gains to nearly every industry and help companies be more cost- and energy-efficient, while expanding revenue opportunities.”

Nvidia Earnings Growth

In its May 22 announcement, Nvidia reported record quarterly revenue of $26.0 billion. That was an increase of 18% from the fourth quarter and a 262% year-over-year jump.

The company also said its quarterly cash dividend would climb 150% to $0.01 per share on a post-split basis.

Further, Nvidia said its data center revenue alone had notched a quarterly record of $22.6 billion. That was up 23% from Q4 and a leap of 427% from a year earlier.

Earnings Forecast

Analysts generally are bullish about Nvidia’s prospects.

Angelo Zino, vice president and senior equity analyst at CFRA Research, predicts that Nvidia’s earnings will grow 108% this year and 30% next year. That dwarfs his forecasts for growth by the overall S&P 500 Index and its tech sector.

Zino sees earnings growth of 11% for the broad benchmark this year and next. He sees 18% earnings growth for the tech sector this year and 19% next year. “Safe to say that NVDA will outgrow both indexes over the next five years, in our view,” he says.

Nvidia: Part of the ‘Magnificent Seven’

Nvidia is not alone in posting impressive first-quarter numbers either.

The stock market’s “Magnificent Seven”—technology sector stalwarts Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Facebook parent Meta (META), Microsoft (MSFT), Nvidia and Tesla (TSLA)—posted a combined $118.65 billion in net income, or profit, for the first quarter of the year.

That was a jump of about 56% from over a year ago, even with Tesla’s profit slipping 55%. Nvidia’s gain was the Magnificent Seven’s largest in dollars and in percentage terms as well, at 628%.