After the close, Nvidia’s 10-for-1 stock split announced in May during the company’s most recent earnings call took effect. But it will do little to change the company’s $3 trillion valuation or its fundamentals, which so far have investors salivating.
“You and I both know that stock splits are cosmetic, at least to existing shareholders,” said Paul Meeks, a veteran technology investor and professor at the Military Academy’s Citadel Business School. “In accordance with investor relations practices, Nvidia is clear that they must continue to ask investors some questions.”
Few other companies embody the new corporate hierarchy brought about by the proliferation of artificial intelligence as well as Nvidia. The company’s shares have risen 3,174% over the past five years, and were up 218% last year alone. During its epic run, Nvidia’s market capitalization has soared, surpassing the likes of Amazon and Alphabet. Before the 10-for-10 split, the stock traded as high as $1,209.
Humayun Sheikh, chief executive of Fetch.ai, a startup that specializes in developing tools for artificial intelligence, said the price may be too high for most investors, especially the retail investors the spinoff is intended to attract. “The stock split makes the stock cheaper, which broadens the investor base and therefore enhances Nvidia’s appeal,” he said.
Sheikh also believes the move is at least partly to do with investor perception, saying it could be “influenced by optics” and could accelerate market capitalization gains.
Nvidia’s status as a company that monopolizes the market by providing all the chips and computing power needed by artificial intelligence developers has not been changed by the stock split. In the first quarter, Nvidia’s sales increased 262% year-on-year to $26 billion, exceeding Wall Street’s already high expectations.
Nvidia’s rise in stock price also hints at what else the artificial intelligence boom might bring.
“Nvidia’s price changes last year tell us something about the market, which is that AI may be the new general-purpose technology, like the Internet or electricity, and it will have a huge impact on the productivity of the entire economy, so AI companies will benefit greatly. Shallow,” said Vasant Dhar, a professor at New York University’s business school.
What could go wrong with Nvidia’s stock split?
Still, investors are considering several scenarios in which things could worsen after a stock split, although they acknowledge the odds are slim.
For Meeks, the only thing that could prevent Nvidia from reaching the top is an overall economic slowdown, which he believes is unlikely as he expects the U.S. to avoid a recession and the Federal Reserve to lower interest rates in early 2025. Nvidia’s performance when considering an improving economy.
“If we suddenly went from being on the front foot of high rates to being on the front foot of low rates, it would be very difficult for these stocks to lose their gains,” Meeks said.
Meanwhile, Sheikh said the spin-off was aimed at attracting retail investors, another possible but unlikely concern. Individually, retail investors may own small amounts of Nvidia stock. But collectively, they can make up a large portion of the stake. Therefore, any shock to the system or unexpected change in their perception of the company will still have a significant impact. Just look at GameStop to understand the outsized influence retail investors have on the market.
Dropping a stock to a tenth of its price can be a double-edged sword. “This approach may appeal to Robin Hood-style investors or meme stock enthusiasts,” Sheikh added. “However, if things turn against Nvidia and speculative traders start selling, it could have a negative impact on the price.”
But even if this unwelcome scenario were to occur, it wouldn’t change all the market trends underpinning the chipmaker.
“Nvidia’s price has risen significantly, so any boost from the stock split will be minimal compared to the ‘fundamental’ reasons for its performance,” Dahl said.
