The time has come: Nvidia‘S (NASDAQ: NVDA) The highly anticipated first quarter report capped off an exciting earnings season for artificial intelligence (AI) investors.
In fact, sales are soaring thanks to rising demand for Nvidia’s H100, A100 and new Blackwell graphics processing units (GPUs). Even better? The company’s pricing power helps Nvidia achieve consistent margin expansion and profitability.
Nvidia is currently experiencing a once-in-a-generation growth wave. There’s so much information packed into their earnings report, it’s easy to get distracted by the latest record the company posted.
While the financial performance is undoubtedly impressive, there was one part of the earnings report that really stood out to me: Nvidia announced a 10-for-1 stock split.
According to the earnings release, investors who own Nvidia shares will be eligible for a stock split as of market close on June 6.
Let’s take a look at how stock splits work, and explore why it might be a good idea to pick up Nvidia stock right now.
How do stock splits work?
Stock splits are a form of financial engineering. When a company splits its stock, two major things happen.
First, the number of shares outstanding increases by the ratio proposed in the split. Second, as the number of shares outstanding increases, the stock price subsequently decreases by the same proportion.
If Nvidia’s 10-for-1 split were to take effect today, everyone who owns Nvidia stock would receive nine additional shares for every share he or she owns. But at the same time, your average cost per share would be reduced by a factor of 10.
Because the number of shares and the stock price change in the same proportion, the market cap for Nvidia theoretically remains unchanged.
However, this is rarely the case. Let’s take a look at the history of Nvidia’s stock split.
Has Nvidia split its shares before?
Nvidia has completed five stock splits since its IPO. The last time Nvidia split its stock was July 20, 2021.
The chart below illustrates the movements in Nvidia stock 30 days after completing the 4-for-1 split in July 2021.
The last time Nvidia split its stock, investors enjoyed a return of nearly 12% in just one month after the split. By the end of December 2021, Nvidia shares had risen an eye-popping 58% since the day they split in July.
Is Now a Good Time to Buy Nvidia Stock?
In general, trading activity increases when a company conducts a stock split. The reason for this is that while the split does not inherently change the company’s valuation, shares are seen as cheaper.
In other words, since a split forces the stock price to fall, many investors think the stock is on sale and will benefit from a lower price. This is not the case, and it is all psychological.
With Nvidia stock trading at over $1,000 per share, it’s likely that many retail investors view the stock as expensive. But keep in mind that even though the post-split price for Nvidia stock would be around $100, the charts above indicate that shares could experience excessive momentum post-split. This means that prices can rise sharply in a short period of time and investors are essentially buying shares at a price of 1.5 hours higher valuation compared to pre-split levels.
Since Nvidia’s last split in July 2021, its shares are up more than 450%. These abnormally high returns have catapulted Nvidia to the world’s third most valuable company – behind only it Microsoft And Apple.
This is where valuation analysis becomes important. Right now, Nvidia stock is trading at a price-to-free cash flow multiple of 66. This may seem high, even for a growth stock. However, this is actually significantly lower than Nvidia’s average over the past three and five years.
Moreover, Nvidia’s biggest competitor, Advanced micro devices, trades at a price-to-free-cash-flow ratio of 230x. Since AMD isn’t growing nearly at the same rate as Nvidia, I’d say Nvidia stock looks more attractive.
While Nvidia stock may seem pricey, the above analyzes illustrate that the company is actually trading at a more normalized level compared to its closest competitor. Furthermore, given the historical trends from Nvidia’s last stock split, I’m pretty sure the stock could gain new attention after the split.
For these reasons, I would encourage investors to pick up shares of Nvidia stock before June 6. While it may be tempting to flip stocks for a quick profit after the split, the returns in recent years speak for themselves.
Investors should use a long-term time horizon and allow day traders to enter and exit around the time of the split. The longer-term themes show that buying shares before a split and holding them for several years is the superior strategy.
Should You Invest $1,000 in Nvidia Now?
Consider the following before buying shares in Nvidia:
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Adam Spatacco has positions at Apple, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Should You Buy Nvidia Stock Before June 6? was originally published by The Motley Fool
