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It would be hard not to mention Nvidia (NVDA) The rise of artificial intelligence (AI) and Nvidia’s triple-digit jump are definitely among the major news stories of 2023.
By the end of December, Nvidia had soared to about $500 a share, which was too expensive for many investors who wanted to buy the entire stock.
Will there be a stock split in 2024 that will reduce the price of all shares? Will that affect whether investors should continue buying the stock?
Here’s what you need to know:
Why Nvidia Stock Could Split
Predicting a stock split isn’t rocket science, but some clues indicate it’s coming soon at Nvidia. The company has a history of stock splits. This refers to a company doubling or splitting its number of shares without changing its overall market capitalization. In other words, as the number of shares increases, the value per share decreases.
Nvidia’s most recent split took place in 2021. Prior to the split, the stock was trading at $744. Nvidia stock isn’t that expensive yet, but $500 is just around the corner.
By 2021, Nvidia had split its stock four more times between 2000 and 2007. In his seven years, the stock price rose 334%. I think management wants to keep the stock price favorable to most investors.
The rapid growth of AI in 2023 also established a growth story centered around Nvidia that could extend into the future. In other words, NVIDIA’s fundamentals look like the stock is destined to rise in the coming years. Therefore, I believe that NVIDIA’s stock split is the next issue. when and it’s not if.
But this is the secret of stock splits
Investors need to understand what a stock split does and doesn’t do. A stock split reduces the trading price of the stock. This makes it cheaper to own part of the business, but the split has no fundamental impact on the value of the shares. Splitting a stock into larger parts (shares) lowers its price.
For example, let’s say you want a pie. When he goes to the store, he sees a pie worth $40 being sold as two halves for $20 each. Not wanting to pay $20 for a pie, he cuts the pie in half and asks the store to divide it into four pieces and sell them for $10 each. In this case, you pay $10 for the pie, but you get a smaller pie.
Stock splits work similarly. Although the company’s value is the same, investors are paying a lower share price for a smaller portion of the business that the stock represents. That’s not necessarily a bad thing, but remember that stock splits don’t change the fundamental value, only the stock price. Investors who cannot afford to buy full shares may also consider purchasing fractional shares.
Should investors buy NVIDIA beyond 2024?
Investors should buy NVIDIA if they like the direction of the business, not because of what management is doing with the number of shares. The good news is that Nvidia is likely to be a great buy in the long run. AI chips are installed in large data centers to handle intense computing workloads and are the clear leader in the market for AI chips.
The company’s most recent quarter’s revenue increased 200% year-over-year. Analysts expect long-term earnings growth to average 42% per year. Despite the stock’s significant price appreciation in 2023, the stock trades at just 40 times forward earnings. The resulting price-to-earnings ratio (PEG) of just 1x suggests the stock is undervalued given long-term growth expectations. materialize.
NVDA PE Ratio (Forward) Data by YCharts
There are no risk-free stocks. Competition is certain for Nvidia, and there is no certainty that it will be able to meet its growth projections. But if investors plan to hold for the long term, they should be rewarded.
Justin Pope has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
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