Nvidia (NASDAQ: NVDA) dominates the artificial intelligence (AI) chip market, and this has driven triple-digit profits in recent years. AI is perhaps the hottest investment theme right now, and this could continue. After all, analysts say the AI ​​market could be worth more than $1 trillion by the end of the decade. So it’s no surprise that Nvidia stock is up 600% over the past three years.
This momentum has helped push Nvidia stock to nearly $1,000 in recent times. And they even surpassed that level after the company announced another blowout quarter, along with a move many investors had hoped for: a stock split.
This will significantly lower the price of each Nvidia share. The big question is: should you buy Nvidia stock before the June 7 stock split or wait until you can get shares at the lower price?
Lowering the price of each share
First, let’s talk about stock splits in general. They don’t change the market value of a company or the value of your holdings if you already own the shares. Instead, a stock split will lower the price of each share by offering more shares to current holders. The ratio of the split determines the number of shares each investor will receive.
In Nvidia’s case, it’s a 10-to-1 stock split, so for every share you own, you get nine more. At the current price of approximately $1,139, each individual share will now sell for $113. To take advantage of this, you must be a registered shareholder as of June 6, and the additional shares will be distributed after market close on June 7.
Should you join Nvidia before or after this long-awaited stock split? The short answer is: it doesn’t matter, and here’s why. As previously mentioned, a stock split does not change the value of the company or the value of an investor’s holdings. If you buy one share today or ten shares after the split, you invest the same amount in cash.
Furthermore, stock splits themselves are not a catalyst for stock performance because they are merely mechanical movements. So Nvidia stock is not likely to rise the day after the split just because a split has occurred. Any potential gains, which could arise now or after the demerger, would likely be related to the company’s recent earnings performance or future growth prospects.
Opening the door to a wider range of investors
The split is positive for Nvidia because it gives a wider range of investors access to the stock, and the company even cited that as a reason for launching the operation. Yes, fractional shares exist, but certain brokers don’t offer them, and some investors prefer to buy full shares. That doesn’t mean a huge wave of new investors will buy Nvidia stock after the split, but over time a lower price per share could attract more investment.
Now let’s come back to you. If you want to bet on a current and future leader in AI, Nvidia makes an excellent buy (now or after the split). The company’s graphics processing units (GPUs) handle the core AI tasks of training and inference – and more. And demand for Nvidia’s chips and systems is so high that the company says it is “racing” to keep up.
Meanwhile, Nvidia will release its Blackwell architecture and most powerful chip ever later this year. And the company promises to update its best-performing chips annually. This will make it very difficult for rivals to dethrone this market giant.
While we all tend to look at a stock price and immediately think ‘that’s cheap’ or ‘that’s expensive’, it’s important to look at the valuation instead, or what the stock is really worth. Today, Nvidia trades at a forward earnings estimate of 42x, which seems reasonable given the company’s market position and growth prospects.
Nvidia is making a great buy and could give you explosive growth over time whether you buy the stock before or after the upcoming stock split.
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Adria Cimino has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Should You Buy Nvidia Before the June 7 Stock Split? was originally published by The Motley Fool
