Come on Chipotle Mexican Grill‘s planned 50-to-1 stock split may have investors wondering which stock could be next.
One candidate does Nvidia (NASDAQ: NVDA), whose shares have risen 230% in the past year and are now hovering around $950 per share. So let’s explore why a company might split its stock, Nvidia’s history of stock splits, and whether investors should buy the chipmaker.
What is a stock split?
a stock split is a corporate action in which a company divides its existing shares into multiple shares, effectively increasing the shares outstanding while maintaining the same market capitalization. This results in shareholders receiving more shares, while their ownership interest and the overall value of their investment remain unchanged.
For example, if an investor owns five shares of a company priced at $1,000 per share and the company conducts a 10-for-1 stock split, the investor would own 50 shares priced at $100 each, leaving the total investment value at $5,000. .
Why would a company split its shares?
While many brokers let retail investors buy fractional shares, others, such as Vanguard, do not offer this option. So if a stock like Nvidia is trading at a high price, it could become too expensive for many potential investors. Having a lower share price can make a stock more affordable, potentially leading to more demand for the company’s stock, thus increasing its overall market capitalization.
Another benefit is that a lower stock price can help attract and retain talented employees. Nvidia co-founder, president and CEO Jensen Huang supports this reasoning, saying it gives employees more flexibility in owning company stock through compensation or stock ownership plans.
Nvidia has split its shares before
Nvidia is no stranger to stock splits. Since going public in 1999, it has split its shares five times, all under Huang. The company’s most recent split, a 4-for-1 split, occurred in July 2021.
Notably, when the company announced its latest stock split, shares were trading near $600 per share, well below the current price of $950 per share.
When Jim Cramer asked about it in March, Huang said, “We’ll think about it,” and reiterated why he likes the practice, saying, “It’s a good thing. We want to make sure we take care of our employees. “
Is Nvidia a buy ahead of a possible stock split?
Although stock splits may generate interest, investors are advised not to base their investment decisions solely on this factor. Instead, financial performance and management leadership have a much greater impact on long-term stock performance.
In Nvidia’s fiscal 2024, the company generated $60.9 billion in revenue and $29.8 billion in net profit, an improvement of 126% and 581%, respectively, compared to fiscal 2023. The rapid increases were largely driven by growing demand for its pricey H100 -Products. chip, the driving force behind the boom in generative artificial intelligence.
Huang summed up the unprecedented fiscal year by saying in the company’s fourth-quarter earnings results: “Accelerated computing and generative AI have reached the tipping point. Demand is surging across companies, industries and countries worldwide.”
Nvidia management expected revenue of about $24 billion for the first quarter of 2025, which would represent a 234% increase year-over-year. Additionally, management forecast gross margin under generally accepted accounting principles (GAAP) to be between 76.3% and 77%, resulting in a significant year-over-year increase of 64.6%. Any time a company can increase its gross margin, it shows its pricing power, which Nvidia has with its industry-leading chips.
No matter how fast a company grows, investors should still pay attention to its valuation to ensure they don’t pay too much for the stock. For a mature company like Nvidia, the price-to-earnings ratio (P/E) is a standard valuation metric that looks at a company’s share price compared to its earnings over the past twelve months. At the time of writing, Nvidia is trading at 79.3 times trailing earnings, higher than the five-year median of 71.9. However, if you look at Nvidia’s forward price-to-earnings ratio, which compares the stock price to the company’s expected earnings over the next twelve months, the shares trade at a more reasonable 37.6.
While value investors may scoff at Nvidia’s valuation, given its average price-to-earnings ratio S&P500 23.2 times earnings, it is important to highlight the unprecedented growth Nvidia has seen in terms of revenue and net income over the past year. For these reasons, coupled with the continued growth of generative artificial intelligence, long-term growth investors should consider buying or expanding Nvidia. Investors can always implement a dollar-cost averaging strategy to build a position over time without the stress of short-term volatility.
Should You Invest $1,000 in Nvidia Now?
Consider the following before buying shares in Nvidia:
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Collin Brantmeyer has positions in Chipotle Mexican Grill and Nvidia. The Motley Fool holds positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool has a disclosure policy.
Stock Split Watch: Is Nvidia Next? was originally published by The Motley Fool
