Step aside, Chipotle Mexican Grill (NYSE:CMG). A more heavily anticipated stock split is now on the way. Nvidia (NASDAQ: NVDA) announced in its first quarter update last week that it plans to conduct a 10-for-1 stock split effective June 7, 2024. Chipotle’s board of directors approved a 50-for-1 stock split in March, which expected to come into effect on June 26, 2024.
Nvidia is by far the bigger winner so far this year. Shares of the GPU maker have skyrocketed more than 125%, compared to a gain of more than 35% for Chipotle. But which is the better stock split: Nvidia or Chipotle?
Forget stock splits
First things first: forget stock splits. I know a lot of investors are excited about them and I started this article by talking about them, but they are practically meaningless.
Of course, both Nvidia and Chipotle shares will see lower stock prices soon. And perhaps this will encourage some retail investors to buy. The reality, however, is that anyone who wanted to invest less than the price of one share in Nvidia and Chipotle could have already done so. How? Many online brokers offer the option to buy fractional shares of top stocks.
Another factor to consider is that stock splits aren’t always a great catalyst for a stock’s price. And when they do, the gains are often temporary.
Most importantly, stock splits do not change a company’s underlying business. Stock splits only increase the number of shares outstanding and decrease the price of each share. That is it.
How Nvidia and Chipotle compete against each other
Still, Nvidia and Chipotle’s upcoming stock splits could fuel interest in both stocks. How do they relate to each other? Let’s start with the financial position of each company.
Nvidia reported first-quarter revenue of $26 billion, an increase of 262% compared to the same period last year. The company posted profits of nearly $15 billion, up 628% year over year. Nvidia’s cash on hand was $31.4 billion as of April 28.
Chipotle’s first-quarter revenue rose 14.1% year over year to $2.7 billion. Profit rose 13.3% to $359.3 million. The restaurant operator had nearly $727.4 million in total cash and cash equivalents as of March 31.
In terms of growth prospects, Wall Street expects Nvidia’s revenues to grow at an average annual rate of nearly 43% over the next five years. Analysts expect Chipotle’s profits to rise about 22% annually over the same period.
What about the rating? Nvidia’s shares trade at a lofty 41.5 times forward earnings estimates. However, the stock’s price-to-earnings-growth ratio (PEG) is a more reasonable 1.35. Meanwhile, Chipotle’s forward earnings multiple of 58.8 and PEG ratio of 2.72 are even higher than Nvidia’s.
I doubt income investors will find either stock attractive. However, Nvidia does offer a dividend, while Chipotle does not. Nvidia also recently announced a 150% increase in its dividend payout.
Buy a better stock split?
This decision seems simple. Nvidia’s financials are more impressive than Chipotle’s. The giant chipmaker has stronger growth prospects. Its valuation is more attractive. Nvidia even offers a small dividend. It’s the absolute winner in my opinion.
However, just because Nvidia is a better choice than Chipotle doesn’t automatically mean it’s the best stock to buy now. As great as Nvidia is, I think other stocks could be even bigger winners in the coming years. These stocks may not experience stock splits, but that doesn’t matter.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool has a disclosure policy.
Better stock split: Nvidia or Chipotle? was originally published by The Motley Fool
