What Today's Stock Split Means for Nvidia (and You)

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Today’s operation will lower the price of each Nvidia share.

The big moment is here. After today’s market close, Nvidia (NVDA -0.09%) will complete its 10-for-1 stock split, an operation that will bring down the price of this high-flying stock from roughly $1,200 to more like $120. Nvidia shares have soared — more than 500% over the past three years — thanks to the company’s leadership in the high-growth artificial intelligence (AI) chip market.

Why is Nvidia splitting its stock, you might ask? Nvidia itself answers the question: “To make stock ownership more accessible to employees and investors,” the company said during its earnings report late last month. This doesn’t change the overall market value of the company. But it does make it easier for a broader range of investors to buy the stock because the price of each share will be lower.

So now that this much-awaited event is happening, let’s find out what it means for Nvidia — and for you.

Image source: Getty Images.

From gaming to AI

First, a quick summary of Nvidia’s path to this point. Nvidia used to generate most of its revenue in the video game industry — with its graphics processing units (GPUs) powering the intense visuals needed in gaming. But times have changed. Even though the company’s GPUs still serve gaming clients, Nvidia now makes the lion’s share of its revenue by selling these extremely powerful chips to AI customers.

The tech giant’s revenue has soared in the triple digits quarter after quarter and most recently surged to a new record of $26 billion thanks to this transition. Nvidia’s GPUs are the fastest around, and that’s why the company has secured more than 80% of the AI chip market. Of course, rivals regularly release new chips, but Nvidia’s promise to continue innovating could keep it in the leading position for the long term.

Now let’s talk about Nvidia’s stock split. These operations involve issuing more shares to current holders to lower the price of each individual share — but, as I noted above, they don’t change the overall market value of the company or the value of your holding. It’s simply a mechanical operation.

Nvidia’s split involves the issuance of new shares on a 10-to-1 basis to current holders after the close of trading today, and the stock will begin trading on a split-adjusted basis on Monday. This means if you own one Nvidia share, you’ll be given nine more. Your 10 shares will still be worth the same as your one share prior to the split. And Nvidia’s valuation remains unchanged, so the stock isn’t “cheaper” even if it’s more affordable for you from a per-share perspective.

What happens if you buy Nvidia today?

What happens if you buy or sell Nvidia shares today as the split unfolds? The right to the new shares transfers over to the new owner, meaning no one gets left behind — so you can buy or sell Nvidia stock as you would any other day. But if you buy or sell the stock on Monday, it will be at the new price.

Now let’s get back to our question. What does this operation, since it’s just a mechanical one, mean for Nvidia and for you as an investor? A stock split isn’t a catalyst for stock performance, so I wouldn’t expect the stock to significantly rise or decline on Monday — unless unrelated news offers it direction.

But, over time, this lower per-share price should make it easier for more investors to access Nvidia shares, and this is positive for the company and for you as a shareholder. And if you’re not an Nvidia shareholder but consider buying the stock, this allows you to invest a smaller amount — for example, just over one-hundred dollars for one share.

Prior to the split, you would have had to invest in fractional shares to gain access to Nvidia for this amount. The problem here is some brokerages don’t offer fractional shares — and some investors simply prefer buying full shares.

All of this means today’s stock split is a wise long-term move for Nvidia, and it offers you an opportunity to easily get in on this growth story for a lower per-share price.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.