Nvidia’s stock split is likely just the start of similar efforts by other companies. Investors should pay attention, as stock splits often precede big rallies.
When Nvidia reported its first-quarter results last week, it announced a 10-for-1 stock split at the close of trading on June 7. Investors will receive 10 shares for each share they own, with each share worth one-tenth of the company’s current price of $1,136 as of Wednesday morning. Current shareholders will have more shares, but the value of their shares will remain the same.
The purpose of a stock split is to make shares more affordable by lowering the price, as some retail investors may be hesitant to buy stocks when prices are too high. Lower stock prices encourage more buying, which should increase a company’s market valuation and therefore the price of its bonds.
This lowers the interest rates at which companies can borrow, and higher valuations also make it easier to use equity as currency for acquisitions.
Not that Nvidia needs to raise capital, but simply splitting its stock would not be detrimental to the company or its share price, and the benefits are clear.
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The company’s shares have risen nearly 20% since news of the stock split broke on May 22, but it’s hard to know exactly why the increase is happening because the company also released earnings at the same time. Revenue was many times higher than in the same period last year and beat analysts’ expectations as demand for data center chips continues to explode due to the rise of artificial intelligence. Profit margins and revenue beat expectations even more.
What is certain is that the stock split reflects investors’ willingness to pay a high price for what is a very strong business: The company’s shares have risen more than tenfold since the bottom of the bear market in October 2022, and Nvidia has emerged as the world’s leading AI enabler.
“Stock splits are a sign of strength,” wrote Jared Woodard, strategist at Bank of America.
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According to his data, companies that split their stocks see an average 25% rise in their stock prices in the 12 months following the announcement, compared with an average 12% rise in the S&P 500 index over the same period. Stock price increases are more common than declines, and the average increase is greater than the average decrease. This is further evidence that companies that split their stock are usually solid investments.
The good news is that, judging by the number of companies with high stock prices, more stock splits are likely on the way. Homebuilder NVR shares
,
The company tops Bank of America’s list of stock split candidates, with its shares trading at $7,356 as of Wednesday. Another candidate is online travel agency Booking Holdings Inc.
,
The stock price is $3,790.
The other six stocks with shares priced above $1,000 are Chipotle Mexican Grill
,
AutoZone
,
METTLER TOLEDO INTERNATIONAL
,
Broadcom
,
Fair Isaac, TransDigm Group
.
Chipotle announced a 50-for-1 stock split in March and its board of directors approved it, and shareholders will vote on it next.
Other candidates for division include Domino’s Pizza and UnitedHealth Group.
,
Parker Hannifin
,
Thermo Fisher Scientific
,
Netflix
,
and
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Eli Lilly
,
Both stocks are priced above $500.
Consider buying some of these names.
Email Jacob Sonenshine at jacob.sonenshine@barrons.com
