Nvidia’s 10-for-1 stock split was recently announced along with its earnings for the first quarter of the fiscal year on Wednesday. According to the company’s release, the split-adjusted shares will start trading on June 10.
This announcement led to a positive reaction from the market, with Nvidia’s stock price jumping by 7% at the opening bell on Thursday, pushing it over the $1,000 mark. Over the past 12 months, Nvidia’s stock has seen a remarkable increase of 243%.
While stock splits can generate excitement among investors, they do not change the fundamental value of a company. Instead, the effect is “more of a psychological phenomenon.”
In a report by CNBC Make It, Mr Sam Stovall, CFRA’s Chief Investment Strategist, explained, “People would rather buy 16 shares at $20 than four shares at $80, even though it’s the same value—it’s just human nature.”
Stock splits are often associated with strong financial performance and may signal that the company is confident about its future earnings.
Mr Stovall added, “It sends two messages — one, that they want the smaller, retail investors to participate in the rally, and two, that the company itself has confidence in its own earnings projections in order to maintain a lofty price.”
A stock split means a company issues additional shares to current shareholders based on how many shares they own. For Nvidia’s upcoming 10-for-1 split, if you own one share worth $1,000, you will end up with ten shares worth $100 each.
This, however, does not change the overall value of your investment. “The earnings per share, the price-to-earnings ratio, the dividend yield all stay the same,” Mr Stovall notes.
“The day after the split, you wouldn’t notice a change in your portfolio other than that the share price and number of shares had changed,” he added.
While lower share prices have historically made it easier for retail investors to buy shares, this is less relevant today.
Most major online brokers now allow the purchase of fractional shares, meaning you can invest small amounts, such as $10, in companies like Nvidia regardless of the stock price.
In essence, a stock splits should not be the primary reason to invest in a stock. Investors need to focus on the company’s fundamentals instead.
Nvidia’s recent financial performance has been impressive. Revenue increased 262% year over year for the first quarter, marking the third consecutive quarter of over 200% growth.
According to Mr Stovall, “Nvidia keeps blowing the lid off of analysts’ projections over the past year. Even with analysts readjusting their estimates, Nvidia still outperforms.”
While Nvidia’s strong performance is noteworthy, it’s important to remember that past performance does not guarantee future results. Prospective investors should carefully assess the company’s potential for future growth and earnings. /TISG
Read also: 15% Nvidia’s revenue worth $2.7B came from Singapore
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