Author: Michael Zakko
Publication date: 12.06.2024
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Nvidia, a semiconductor company, is currently splitting its shares 10-for-1. Investors who held Nvidia shares as of Thursday's closing of trading will receive nine more shares when the market closes on Friday, June 7. Given how much the stock price has increased, the split makes sense.
Nvidia's stock has increased by more than 213% over the last 12 months and more than 144% this year. The company's success can be attributed to the crucial role its semiconductor chips play in artificial intelligence model training and performance. At the end of 2023, it sold for $495 a share; today, it trades for over $1,200. In May 2023, the stock was trading close to $305 per share, right before the company released massive results that sparked the AI stock boom.
What the Split of Nvidia's Stock Means
The split has no impact on the company's overall value or Morningstar's assessment of its stock, even though it does increase the number of outstanding shares in circulation. Theoretically, splitting the stock shouldn't add economic value, but it will increase smaller investors' access to the company. Although $500 is not enough to purchase a single Nvidia share at this time, it will be enough to purchase multiple shares following the split.
Nvidia's estimated fair value following the split will be increased to $105. The company's very high uncertainty rating, its 3-star rating (which indicates that the stock is considered fairly valued), and its broad economic moat rating will remain untouched.
Why Do Businesses Divide Up Their Stock?
Each share is divided into several new shares when a business splits its stock. This raises the total number of outstanding shares, but it has no effect on the market capitalization, or overall worth, of the company. Businesses typically take this action when their share price has increased significantly to the point that it may be challenging for individual investors to buy them. Lower pricing can also have the psychological effect of making shares appear more appealing to investors, even though the company's core value hasn't changed. Having more cheaper shares to draw in more purchasers can assist increase liquidity.
Nvidia is the market leader in artificial intelligence chips
Nvidia's bull case strengthens its pivotal role in the artificial intelligence (AI) sector. In the field of accelerated computing, which combines specialized hardware and software to accelerate computationally intensive data center workloads such as artificial intelligence applications, Nvidia graphics processing units (GPUs) are the industry standard. Actually, according to a recent Wall Street Journal article, "Nvidia's chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%."
Nvidia's expansion into related data center product categories, such as central processing units (CPUs), networking equipment, subscription software, and cloud services, has been made possible by its dominance in the GPU industry.
Because Nvidia's shares have tripled in the last year, some investors might be concerned that the company is overvalued. However, profits have increased faster than before. Recall that in Q1, non-GAAP net income climbed by 462%. This indicates a decline in the price-to-earnings ratio.
Conclusion
Nvidia's 10-for-1 stock split reflects its remarkable growth, driven by its pivotal role in the AI sector. The split, effective after the market closes on June 7, doesn't alter the company's overall value but makes shares more accessible to smaller investors. Despite the surge in stock price, Nvidia remains fairly valued, with a strong position in AI chips, expanding into related markets. This strategic move enhances liquidity and investor appeal, supporting Nvidia's sustained market leadership and robust financial performance.
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