What is the most popular stock doing in the S&P500 do after they skyrocket more than any other large-cap stock on the market? Announcing a major stock split could be a good follow-up.
That’s exactly what Nvidia (NASDAQ: NVDA) do. Shares of the maker of graphics processing units (GPUs) have nearly tripled in the past twelve months. Nvidia will conduct a 10-for-1 stock split after the market closes today. The stock will trade at a much lower share price on Monday, June 10.
But will Nvidia stock rise after the stock split? This is what history shows.
Good times ahead?
Stock splits do absolutely nothing to change a company’s operations or growth prospects. All they are guaranteed to do is increase the number of shares outstanding and decrease the stock price.
However, one reason why companies do stock splits is that this move can be a great catalyst. The idea is that some investors will sit on the sidelines with a particular stock if it is too expensive for them to buy. But when the share price is lower, they are more willing to buy shares. This could especially apply to a heavily followed stock like Nvidia.
Is this what history shows? Yes, according to bank of America‘s Research Investment Committee. It found that stocks achieved a total return of 25% in the twelve months following the announcement of a stock split. By comparison, the S&P 500 rose an average of about 12% over the same period.
But the story hasn’t been so good in recent years. Since 2010, stocks with splits have delivered a total return of about 18% during the 12 months following a stock split announcement, versus 13% for the S&P 500, according to a report from Statista based on data from Bank of America, Bloomberg and global financial data .
What the history of Nvidia’s stock split reveals
Has Nvidia made excellent profits after its previous stock splits? The company has split its shares five times in the past. Let’s look at what happened before and after each case.
On June 27, 2000, Nvidia executed a 2-for-1 stock split. In the weeks leading up to the split, the stock climbed steadily higher.
However, Nvidia’s shares fell immediately after the stock split and were down significantly by the end of the year. A year after the split, the share had risen sharply. However, there is no way to know for sure whether these gains are directly attributable to the stock split.
Nvidia conducted another 2-for-1 stock split on September 12, 2001. This time, the company’s shares fell both before and immediately after the split. Shares recovered for the rest of the year. However, then the market began a steep decline (as did the broader market).
Several years passed before Nvidia’s next 2-for-1 stock split occurred on April 7, 2006. In this case, the stock rose before the split and fell shortly after. After a sharp sell-off, Nvidia shares bounced back. Yet a year later the price had barely risen more than 1%, while the S&P 500 rose more than 13%.
The following year, Nvidia conducted its first 3-for-2 stock split. The stock climbed again before the stock split. However, the good times did not last long. Nvidia soon collapsed with a decline much worse than the S&P 500.
Nvidia conducted a 4-for-1 stock split on July 20, 2021. This was another good news/bad news scenario.
The chipmaker’s shares rose both before and immediately after the stock split. However, a year later, Nvidia’s stock price was lower than when the split occurred. However, Nvidia still managed to outperform the S&P 500 during this period.
A better reason to buy Nvidia stock
Can we draw firm conclusions from the history of Nvidia’s stock split? Unfortunately not.
I also wouldn’t put too much faith in Bank of America’s findings on long-term stock outperformance following split announcements. It’s possible that the individual stocks that beat the S&P 500 after the stock split announcement would have done so without splitting their shares.
In any case, there is a much better reason to buy Nvidia stock than the stock split. Demand for powerful chips to train and run artificial intelligence (AI) models continues to skyrocket. Nvidia is the undisputed leader in the AI ​​chip market, and its rapid pace of innovation seems likely to keep the company at the top for years to come.
This should translate into strong earnings growth. When profits rise, stock prices usually follow: stock split or no stock split.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions at Bank of America. The Motley Fool holds positions in and recommends Bank of America and Nvidia. The Motley Fool has a disclosure policy.
Will Nvidia Stock Rise After Stock Split? This is what history shows. was originally published by The Motley Fool
