Nvidia may be an exciting stock, but its 10-for-1 stock split – like most stock splits – is nothing

If you don’t know much about the semiconductor giant Nvidia (NASDAQ: NVDA), it is worth learning, as the company has been very successful lately in the area of ​​​​artificial intelligence (AI). Nvidia is often in the news, and most recently this is due to a 10-for-1 stock split that has many investors excited.

But most stock splits — including this one — aren’t as exciting as they might seem. Before we get into stock splits, let’s agree that Nvidia, the company, It is exciting. The performance of your shares is certainly:

Data source: Morningstar.com, June 3, 2024.

These are eye-popping numbers. A 50% annual return will increase the investment by more than 437 times in 15 years! If you only owned Nvidia for the last five years, your holding would have doubled in value every year on average.

Nvidia’s stock performance is exciting because the underlying business is exciting. Over the years, Nvidia has gone from a gaming chip specialist to a company that now makes most of its revenue from your data center technology. This is due to the growing prevalence of artificial intelligence (AI), which demands more and more firepower from semiconductors.

Check out some additional interesting numbers from Nvidia:

Data source: Morningstar.com.

In the first quarter of Nvidia’s fiscal year 2025, revenue increased an impressive 262% year over year! And total revenue for the past 12 months is nearly $80 billion, as artificial intelligence fuels further data center growth. (In fact, AI could even fuel further growth in Nvidia’s gaming business.)

Nvidia’s stock split isn’t all that exciting

Despite the legitimate enthusiasm for Nvidia and its stock, the enthusiasm for the 10-for-1 stock split (which occurred on June 7) is misplaced. Shares are up more than 20% on June 3, since the company announced impressive first-quarter results and a stock split on May 22.

What is a stock split?

Stock splits increase the number of shares and decrease the value of each share, proportionately. A common split formula is 2 for 1, where you end up with two shares for every one you owned before the split and the share price is cut in half. But let’s see what happens with the Nvidia division.

Imagine you own 10 shares of Nvidia pre-split, at a price of, say, $1,160 per share. The total value of your shares is $11,600. When the shares are split, you will be left with 100 shares. But the stock price will suddenly be about a tenth of what it was – that is, about $116 each. Multiply your 100 shares by the price of $116 and you get a total value of $11,600.

The story continues

Stock splits are primarily an accounting event, and for most investors, a nothing burger. In some cases, though, like this one, the stock split can bring the stock price to a level that works for more investors. Pre-split, with Nvidia shares above $1,100, many people might have assumed they couldn’t afford a single share.

What is a reverse stock split?

It is important to note that there are also reverse stock splits and they are a little more significant, as they are usually carried out by companies that are in difficulty. A reverse split will support a stock’s price, which can help it avoid delisting from the stock exchange and can help it appear less of a risky stock.

If Nvidia executed a 1-for-10 reverse split, your 10 shares would become one share, worth about 10 times the value of the shares trading before the split. Again, the total amount does not change.

Should you buy Nvidia stock?

Stock split aside, what most people are probably wondering about Nvidia is: is it too late to buy shares now?

There is no one-size-fits-all answer to this question, and opinions often differ on the valuation of any given stock. Many people consider Nvidia shares to be overvalued at recent levels, and that’s fair. Its recent price-to-sales ratio of 36, for example, is well above its five-year average of 19.

But it’s also reasonable to consider that the seemingly high valuation isn’t that outrageous, given how quickly the business is growing. (Note that it has been considered overvalued for years.)

So learn more about the company and crunch the numbers yourself. If you plan to buy and hold for many years, buying now could be a smart move. Even if there is a setback in the near future, the company has great potential for long-term growth. However, if you are risk-averse or afraid of volatility, look elsewhere.

Should you invest $1,000 in Nvidia now?

Before buying Nvidia stock, consider the following:

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Selena Maranjian has positions at Nvidia. The Motley Fool has positions and recommends Nvidia. The motley fool has a disclosure policy.

Nvidia may be an exciting stock, but its 10-for-1 stock split – like most stock splits – is nothing was originally published by The Motley Fool