When reflecting on the stock market’s 2023, it is impossible to ignore Nvidia (NASDAQ: NVDA) and its remarkable ascent. The skyrocketing growth of artificial intelligence (AI) and Nvidia’s triple-digit surge have undeniably dominated financial discussions.
By the close of December, Nvidia had propelled to approximately $500 per share, a steep valuation for many investors seeking to purchase whole shares.
Will the stock division take place in 2024, potentially bringing down the share price? And should this decision sway the minds of investors when considering purchasing more shares?
Here’s a comprehensive guide:
Indicators for a Potential Stock Split
Forecasting a stock split is not an enigma, and certain signals point towards an imminent split for Nvidia. The company has a track record of splitting its stock — an action that involves multiplying or dividing its share count without altering the overall market capitalization. Consequently, an increase in the number of shares results in a decrease in the value per share.
Nvidia’s most recent split occurred in 2021 when shares were trading at $744 before the split. Although the current share price has not yet reached such remarkable heights, at $500, it is getting perceptibly close.
Prior to 2021, Nvidia underwent four additional stock splits between 2000 and 2007, during which shares soared by 334%. This historical data suggests management’s inclination towards maintaining a reasonable share price for the majority of investors.
The accelerated proliferation of AI in 2023 has further cemented a growth narrative around Nvidia that is likely to extend well into the future. In other words, Nvidia’s robust fundamentals are poised to drive the stock to even greater heights in the years to come, leading to the inevitable conclusion that a Nvidia stock split is a matter of “when” rather than “if.”
The Untold Truth About Stock Splits
Investors must comprehend both the implications and limitations of stock splits. While splits diminish the trading price of a stock, making it more affordable to own a portion of the business, they do not substantially alter the fundamental value of the stock. Instead, they lower the share price by dividing the stock into more pieces (shares).
Consider this analogy: Imagine you desire a pie. You visit a store where a $40 pie is being sold as two halves for $20 each. Unwilling to pay $20 for half a pie, you request the store to divide the halves into four quarters, each priced at $10. Consequently, you are paying $10 for a smaller slice of pie.
Similarly, stock splits work by maintaining the company’s overall value but allowing investors to buy smaller pieces of the business at a reduced share price. While this may not be detrimental, it’s crucial to remember that stock splits solely affect the share price, not the fundamental value. Additionally, investors incapable of purchasing full shares can explore the option of buying fractional shares.
Should Investors Consider Nvidia for 2024 and Beyond?
Investing in Nvidia should be based on the trajectory of its business rather than the company’s decisions regarding share count. Encouragingly, Nvidia appears to be an outstanding long-term investment. As the predominant market leader in AI chips, Nvidia’s chips are being integrated into colossal data centers to process intensive computing workloads.
The company’s revenue in the most recent quarter surged by 200% compared to the previous year. Analysts foresee an average annual earnings growth of 42% in the long term. Despite its impressive performance in 2023, the stock’s forward P/E stands at just 40, indicating that the stock is reasonably priced. Moreover, a PEG ratio of merely 1 suggests that the stock is a bargain, assuming the long-term growth estimates materialize.
No stock is devoid of risks. Competitors are likely to emerge for Nvidia, and achieving growth forecasts is not a certainty. However, investors contemplating a long-term commitment should reap substantial rewards.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.