This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Recent developments in the field of artificial intelligence (AI) have captured the public imagination over the past year or so. One of the byproducts of this trend has been the surging stock prices of companies at the forefront of this paradigm shift in technology. Nowhere is this more apparent than with chipmaker Nvidia (NASDAQ: NVDA), whose graphics processing units (GPUs) have become the gold standard for AI.
The company's consistent execution and unrivaled business performance have fueled its meteoric ascent. Nvidia stock has gained 540% since early last year, driven by triple-digit revenue and profit growth resulting from surging demand for AI. Yet that's just the beginning. Since Nvidia's IPO in early 1999, the stock has soared from a split-adjusted price of $0.25 to more than $939, representing eye-popping gains of 375,500%.
On Wednesday, in conjunction with the release of the company's quarterly results, Nvidia announced plans to split its stock for the first time since July 2020. The stock has gained more than 800% in the nearly four years since, which is likely the catalyst for the split. This revelation is sparking a fresh wave of interest in an already well-followed stock. Let's review the mechanics of a stock split and what it means for investors.
The stock-split details
Nvidia announced that its board of directors had approved a 10-for-1 forward stock split. This will result from an amendment to the company's Restated Certificate of Incorporation, which Nvidia says "will result in a proportionate increase of the number of shares of authorized common stock."
As a result of this split, shareholders of record as of June 6, 2024, will receive nine additional shares of stock for each share they own after the market close on Friday, June 7. The stock is expected to begin trading on a split-adjusted basis on June 10.
Nvidia investors won't need to take any steps in order to receive the additional shares of stock. Brokerage firms and investment banks handle the particulars, with the adjustments being handled behind the scenes. The stock-split shares will simply appear in investor accounts with no further action necessary. The timing can vary from brokerage to brokerage, so investors shouldn't worry if the newly issued shares aren't there immediately on June 7, as it can take hours, or in some cases days, for the additional shares to make an appearance.
Adding numbers can provide context regarding how the stock-split process plays out. For each share of Nvidia stock a shareholder owns -- it's currently trading for roughly $950 per share (as of this writing) -- post-split, investors will hold 10 shares worth $95 each.
Is a stock split a good thing?
As the above example shows, the total value of ownership won't change based on the split alone; it's merely a different way of viewing the whole. Put another way, if you buy a pizza, it doesn't matter if you cut it into eight slices or 16 slices -- the total amount of pizza remains the same. By the same token, Nvidia stockholders will simply have a greater number of lower-priced shares.
There are those who believe that investor psychology will ultimately play a part, with excitement about the upcoming stock split driving up the share price. It's also been suggested that the lower share price can increase demand for those shares among retail investors. Indeed, management notes in the announcement that the purpose of the split is to "make stock ownership more accessible to employees and investors." While that's frequently the case, that kind of temporary euphoria historically subsides, leaving investors to focus on what matters -- the company's operational and financial performance -- which will ultimately drive the stock price higher or lower.
Is Nvidia stock a buy?
While the stock split alone isn't reason enough to buy Nvidia, there are plenty of reasons the semiconductor specialist is a buy. Investors need to look no further than the company's financial report for evidence to support that contention.
In its fiscal 2025 first quarter (ended April 28), Nvidia reported revenue that soared 262% year over year to a record $26 billion, marking an 18% quarter-over-quarter increase. This drove adjusted earnings per share (EPS) up 461% to $6.12.
For context, analysts' consensus estimates were calling for revenue of $24.65 billion and EPS of $5.59, so Nvidia sailed past expectations with ease.
If there was any doubt, robust demand for generative AI fueled record data center revenue of $22.6 billion, up 427% year over year and representing 87% of Nvidia's total sales.
Another important announcement for shareholders is that Nvidia increased its quarterly dividend by 150%, from $0.04 to $0.10 per share, or $0.01 on a post-split basis. The first increased dividend payment will be made on June 28. Even at the new, higher level, the yield will still be paltry, amounting to just four-tenths of 1%.
It's still very early in the AI revolution, which is even more reason to be optimistic. The worldwide AI market clocked in at $2.4 trillion in 2023 and is expected to rise to $30.1 trillion -- a compound annual growth rate of 32% -- by 2032, according to Expert Market Research. As the gold standard for GPUs used in AI, Nvidia is well-positioned for future success.
Investors shouldn't buy shares for the pending stock split. However, Nvidia's long track record of consistently strong operating and financial results -- and blistering stock price gains -- show why it continues to be such a winning investment.
Some investors will balk at Nvidia's valuation, but you get what you pay for. Despite four consecutive quarters of triple-digit revenue and EPS growth, Nvidia stock is selling for 37 times forward earnings. That's a small price to pay for such robust growth.
That's why Nvidia stock is a buy.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
