Nvidia, the Hottest Stock of the Year, Is About to Get 90% Cheaper

This year's hottest stock is about to become 90% cheaper. After the markets close on Friday, June 7, shares of Nvidia will undergo a 10-for-1 stock split.

The tech company announced the split during its first-quarter earnings call, stating the goal is "to make stock ownership more accessible to employees and investors."

Nvidia, which manufactures graphic processing units, application programming interfaces and high-performance microchips, has seen shares gain 1,843% since the start of 2020 on the back of an AI-fueled surge in demand for its products.

According to its website, more than 40,000 companies now use Nvidia's AI technologies. In 2023, it joined the trillion-dollar valuation club, and in this year, it surpassed Apple to become the second-largest company by market cap ($3.01 trillion) trailing only Microsoft ($3.15 trillion).

What the Nvidia stock split means

Inherently, a stock split doesn't make shares of a company any more or less valuable, nor do they increase or decrease a company's market cap.

"Deciphering a stock's short-term movement is up for debate on what is driving it," says Chris Barto, investment analyst at Fort Pitt Capital Group. "Stock splits do not change anything fundamental."

Whereas share dilution is the act of a company issuing additional stock to raise capital, which in turn reduces shareholders' value, stock splits have a singular aim: to make shares affordable for more investors.

Stock splits reduce the price per share in direct proportion to the increase in shares. In Nvidia's 10-for-1 case, current shareholders will receive nine additional shares for every one share they own, with the company's outstanding shares increasing tenfold.

Pre-split, the stock is trading around $1,198 per share — an asking price that's prohibitively expensive to many retail investors.

But the June 7 stock split changes that, making shares of the Magnificent Seven stock accessible to the broad investing community. The expectation is that, when the split occurs this Friday, shares will be trading for around $119.80 based on its current market price.

Should you buy Nvidia stock?

Importantly, investors shouldn't expect the stock split to act as a catalyst for further gains. According to financial services group Hartford Funds, "Stock splits have no tangible impact on a company’s total value — they simply create more shares at more affordable prices." As a result, "investors shouldn’t buy a stock simply because they hope it’ll rise in price after a split. Over the long term, a company’s value is determined by its earnings, not its stock price."

For Nvidia, its recent earnings history indicates substantial future growth potential. The company's earnings per share (EPS) have exceeded analysts' forecasts every quarter since its last miss on Nov. 16, 2022, while seeing exponential growth from 88 cents in the first quarter of 2023 to $6.12 in the second quarter of 2024 — a gain of 595%. The consensus EPS forecast for the third quarter of 2024 is $6.38.

However, earnings are based on past performance and aren't indicative of future growth. "Earnings and growth have been supportive of Nvidia’s valuation; however, the difficult part moving forward is the sustainability of these earnings and growth of the company," Barto says. "There are the rising risks of competition, pricing and customers who may decide to pull back on [capital expenditures] ... Nvidia is not the only company benefiting from the artificial intelligence trend."

Investors shouldn't use the split as a cue to buy Nvidia stock — or to sell it, for that matter. If it makes sense for your portfolio, buying shares of a company as fundamentally strong as Nvidia is fine. But it's unwise to make that decision based on this week's stock split news.

Or consider a safer approach: Purchasing shares of index funds with heavy allocations to the chipmaker or buying fractional shares (if brokerages offer them) would provide an alternate means of gaining exposure to Nvidia's growth potential.

More stock splits to come

In any event, Nvidia hopes to join Walmart as 2024's next stock split success story. On Feb. 26, the multinational retail corporation had its first stock split in over 20 years.

Following the 3-for-1 split, shares have gained 12% in large part due to strong second-quarter earnings. Walmart shares reached their all-time high of $181.35 on Feb. 20. At the time of writing, the stock is trading around $66.74.

Two other big-name companies splitting their stock this month are Canadian Natural Resources (2-for-1 on June 11, 2024) and Chipotle (50-for-1 on June 26), the latter of which hit its all-time high of $3,239.23 per share on May 10, 2024.

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