Back on May 26, when the company announced its first-quarter earnings, NVIDIA (NVDA -1.01%) also detailed plans to initiate a 4-for-1 split on July 19. The stock has since climbed more than 21% in the wake of the announcement.
Many investors are now asking the question: Is the stock a buy ahead of its highly anticipated stock split next month? Since more investors will be able to afford NVIDIA stock, it stands to reason that there might be an increase in demand. Additionally, stockholders just approved an increase in the total number of authorized shares from 2 billion to 4 million, which will also improve liquidity, since the stock can be bought and sold at a more reasonable price.
While NVIDIA shares certainly look attractive today, the upcoming stock split isn't the reason investors should be loading up on shares.
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Making sense of NVIDIA's 4-for-1 stock split
The upcoming stock split will be NVIDIA's fifth since going public. The tech giant split its stock on a 2-for-1 basis in 2000, 2001, and 2006. The company then split its stock on a 3-for-2 basis in 2007. Its 2021 split will occur on a 4-for-1 basis, meaning investors will receive four shares for every one share they own. The price of the existing shares will be divided by four. For instance, instead of only owning one share -- currently trading at about $760 -- post-split, investors will own four shares priced at $190 each.
NVIDIA's 2021 4-for-1 stock split is scheduled to take place on July 20.
What's the reason for the stock split? NVIDIA said the board declared the share split "to make stock ownership more accessible to investors and employees."
A suitable opportunity?
On the face of it, it might seem that NVIDIA stock is a buy because of the upcoming stock split, but it doesn't hold up to closer scrutiny. For example, if an investor holds 10 shares of NVIDIA stock, and each share is worth $760 pre-split, those 10 shares are worth a total of $7,600. After the split, that same investor will own 40 shares worth $190 each, also worth a total of $7,600 -- illustrating that the total value of their holding ultimately won't change.
Furthermore, even if there's greater demand for the stock because of the lower share price after the split, it will likely be a temporary phenomenon. Other investors with a shorter investing time horizon may simply sell their shares to capitalize on any irrational run-up in the stock price, in an attempt to make a quick buck.
Finally, there's simply no way to know what the news cycle could bring on any given day. Investors can't know how NVIDIA shares will trade between now and the day of the stock split. The impact of broader market trends, the overall economic picture, or some company-specific news could move the stock much more -- up or down -- than any anticipation regarding the upcoming share split.
To summarize, investors should never buy shares in a company simply because it initiated a stock split.
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The real reason to buy NVIDIA stock
Despite all that, there are plenty of reasons that NVIDIA stock is a compelling buy right now -- though it has nothing to do with the upcoming split. Rather, it's NVIDIA's impressive results and the large and growing opportunity ahead that make it a timely opportunity.
NVIDIA's first-quarter revenue climbed 84% year over year and its earnings per share surged 106%. To give that context, NVIDIA's $5.66 billion in revenue far exceeded the $5.3 billion it was guiding for. Revenue in the gaming segment jumped 106% on strong demand for the company's state-of-the-art graphics processing units (GPUs) used by gamers. At the same time, its datacenter revenue grew 79% year over year on a growing trend for NVIDIA's advanced processors used for power cloud computing, data centers, and artificial intelligence (AI).
"We had a fantastic quarter, with strong demand for our products driving record revenue," said Jensen Huang, founder and CEO of NVIDIA.
Given the company's impressive growth and the accelerating secular tailwinds for gaming, cloud computing, and AI, there are plenty of reasons to be bullish for NVIDIA. The company's strong business -- not its upcoming stock split -- is what makes NVIDIA a compelling stock to own for long-term investors.
