For many investors, Nvidia (NASDAQ: NVDA) has become the essential artificial intelligence (AI) stock. That’s because the company’s graphics processing units (GPUs) are the industry standard for accelerating complex data center tasks, such as training machine learning models and running AI applications.
Nvidia shares have surged 780% since its generative AI application ChatGPT went viral in late 2022. The event sparked a wave of spending on AI infrastructure that’s still gaining momentum, and Nvidia has been one of the biggest beneficiaries. In turn, the stock has become a staple in the AI trading community.
Nvidia reset its soaring stock price in June by executing a 10-for-1 stock split. Shares are down about 2% since then, but history shows that Nvidia stock could fall even further.
Stocks acquired through stock splits, such as Nvidia, typically outperform the S&P 500
Generally, companies execute forward stock splits after a substantial increase in stock price, which in itself indicates attractive growth prospects and a competitive advantage. Companies that have these qualities tend to deliver above-average returns to shareholders.
Indeed, Bank of America examined data going back to 1980 and found a correlation. Companies that split their stock returned an average of 25.4% in the 12 months following the announcement of the split. For comparison, the S&P 500 delivered an average return of 11.9% over the same period.
This could mean: Nvidia announced its last stock split after the market close on May 22, 2024. The stock was trading at a split-adjusted $95 per share. History shows that the stock will rise 25.4% to $119 by May 2025. But the stock is already trading at $119 per share, giving no implied upside (or downside) over the next eight months.
Nvidia Underperformed After Previous Stock Splits
We can also make predictions about Nvidia’s future performance by looking at company-specific data. For example, the chipmaker completed five stock splits before the most recent one. The chart below shows how the stock performed over the 12 months and 24 months following those five splits.
|
Stock Split Date |
12 months return |
24 months return |
|---|---|---|
|
June 2000 |
28% |
(52%) |
|
September 2001 |
(72%) |
(49%) |
|
April 2006 |
1% |
(6%) |
|
September 2007 |
(70%) |
(53%) |
|
July 2021 |
(4%) |
145% |
|
Average |
(23%) |
(3%) |
Data source: YCharts.
As shown above, Nvidia has typically performed poorly after stock splits. The stock price fell an average of 23% over the first 12 months and was still down an average of 3% after 24 months.
Here’s what that could mean: Nvidia completed its 10-for-1 split after the market closed on June 7. The stock was trading at a split-adjusted $121 per share. History says the stock will fall 23% to $93 by June 2025. The stock currently trades at $119 per share, so the implied downside is 22% over the next nine months.
That said, past performance is never a guarantee of future results. Furthermore, most of the stock splits in the chart occurred within 12 months of a recession, so Nvidia had little chance of posting positive returns. Whether Nvidia is a good investment going forward depends on its financial performance and what investors are willing to pay to own shares of the company.
Nvidia is the market leader in artificial intelligence chips
Nvidia dominates the market for data center GPUs, chips used to accelerate workloads like AI applications. The company accounted for 98% of data center GPU shipments in 2023, essentially unchanged from the previous year, and those GPUs account for more than 80% of AI chips.
There are two reasons for that dominance. First, Nvidia designs the most powerful GPUs money can buy, and rapid product development keeps its GPUs at the cutting edge of performance. Second, Nvidia complements its chips with a robust ecosystem of software libraries and developer tools called CUDA. The CUDA platform streamlines the process of building GPU-accelerated applications.
According to Grand View Research, sales of graphics processors are expected to grow 27% annually through 2030, driven by the spread of machine learning and AI. Nvidia’s sales should grow at a similar pace, plus or minus a few percentage points. However, earnings could grow slightly faster due to share buybacks and potential margin expansion driven by pricing power.
Wall Street is forecasting that adjusted earnings will grow 35% annually through fiscal 2027 (ending January 2027). That consensus makes the company’s current valuation of 54x earnings seem reasonable. Investors should consider buying a small position in Nvidia shares today, provided they’re comfortable with volatility and are willing to hold on to their shares for at least three to five years.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Bank of America and Nvidia. The Motley Fool has a disclosure policy.
Nvidia Stock Split Update: Down 2% Since June, History Says AI Stocks Will Do It Next was originally published by The Motley Fool
