Everyone who said that Nvidia‘S (NASDAQ: NVDA) the stock price would fall if their prediction came true. But not in the way they expected.
Nvidia executed a 10-for-1 stock split after the market close on Friday, June 7, 2024. The share price in the open market on Monday was approximately 10% of the previous closing price.
The stock is up nearly 30% since Nvidia announced the stock split during its first-quarter update on May 22. Is it too late to buy Nvidia stock after the split?
A simple answer
There is a simple answer to this question: absolutely not too late to buy Nvidia stock. Why is this answer so simple? The stock split does not change the company’s activities.
A stock split does two things. First, it increases the number of shares outstanding. In the case of Nvidia, the number of shares has increased tenfold. Second, this increase reduces the stock price by a proportionate amount.
Did you want to buy Nvidia before the stock split because of skyrocketing demand for graphics processing units (GPUs)? Have you been interested in the stock because of the prospects for the upcoming Blackwell platform? Those reasons to buy remain intact. The only difference between now and before the stock split is that Nvidia’s stock price is much cheaper.
Granted, it’s possible that Nvidia stock could fall further after the big surge prior to the stock split. On the other hand, the stock’s momentum could accelerate if retail investors, previously sidelined due to its sky-high share price, start buying Nvidia.
A more difficult answer
Now a more difficult answer to the question. The optimal time to buy Nvidia may now have passed for reasons unrelated to the stock split.
Demand for Nvidia chips remains exceptionally strong. The company’s sales and profits continue to skyrocket. However, some argue that this is all already factored into Nvidia’s stock price.
The stock trades at almost 71 times trailing-12-month earnings and almost 47 times forward earnings. These rating metrics reflect a lot of of the expected growth. Even Nvidia’s price-to-earnings-growth (PEG) ratio of 1.51, based on five-year growth projections, isn’t particularly attractive.
Is there anything that could realistically derail Nvidia’s growth? The answer to this question is a resounding ‘yes’. Other chipmakers are scrambling to challenge Nvidia’s market dominance, and some of the company’s largest customers are also developing their own custom chips in an effort to reduce their dependence on Nvidia.
The Pelosi Strategy
If you want the opportunity to benefit from Nvidia but are concerned about its growth, there is another approach. You could call it “the Pelosi strategy,” after former House Speaker Nancy Pelosi’s husband, Paul.
Mr. Pelosi invested in Nvidia by purchasing deep-in-the-money call options with an expiration date of at least one year. The call options give him the right (but not the obligation) to buy Nvidia shares in the future. These options have deep-in-the-money strike prices (well below the stock price at the time the options were purchased). This means that their price correlates strongly with changes in Nvidia’s stock price.
Importantly, this approach lowers Pelosi’s risk. He doesn’t need to put in that much money, since buying call options is cheaper than buying the corresponding number of Nvidia shares that these options entitle him to buy.
Investors should still be optimistic about Nvidia’s use of the Pelosi strategy. The good news is that there is reason to be bullish on the stock and the company that has nothing to do with the recent stock split.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Is it too late to buy Nvidia after the stock split? was originally published by The Motley Fool
