Imagine you're baking a pizza at home. You pull it from the oven and run your pizza slicer through it twice, creating four equally sized pieces.
But what if you want more slices? Not more pizza, just more slices? Easy to solve. Just run your pizza slicer down the middle of each existing slice, and voilà: eight slices instead of four.
This same process works with stocks and stock splits. In this way, companies can reduce their stock price by increasing the number of shares outstanding -- making their shares more accessible to retail investors.
Today, let's examine a company that has executed five stock splits over its 24-year history as a public company and might be ready for its sixth: Nvidia (NVDA 6.18%).
Image source: Getty Images.
What's the point of a stock split?
As of this writing, Nvidia shares trade for $463.29. That's a decent amount of dough. And, for many investors, it's too much to spend on a single share of stock.
True, fractional shares mean that investors who don't want to shell out almost $500 on a single share can buy, say, a quarter of a share for a more reasonable $115.75. Yet for many investors, buying fractional shares holds little appeal.
What's more, diversification becomes an issue for investors with modest portfolios of $2,000 or less. Even one full share of Nvidia might make it difficult to diversify across sectors.
In short, stock splits help the average investor, and they help the company too. By raising the number of shares outstanding, the company can fine-tune stock-based compensation -- improving employee retention. In addition, lower share prices should draw more investor interest and thus help the company's stock price to rise.
The case for an Nvidia stock split
As mentioned, Nvidia has split its stock five times. Most recently, the company executed a four-for-one stock split in July 2021, and to say the least, it's proved successful.
The company announced the split in May 2021, when shares were trading around $560/share. By the following month, shares had topped $800 per share.
Now, more than two years later, Nvidia shares are once again well above the $400 per share mark. What's more, shares crossed the $500 per share threshold just a few months ago before pulling back. At present levels, a single share of Nvidia costs more than most of its megacap peers. Among the top 20 largest American companies by market cap, only Broadcom, UnitedHealth, and Eli Lilly have shares with a higher price tag.
Is Nvidia a buy now?
At any rate, Nvidia remains a great company -- whether it splits its stock or not. It's at the forefront of AI innovation thanks to the massive demand for its H100 GPUs. Some estimates suggest that tech giants like Microsoft and Meta Platforms may have bought more than 150,000 units so far this year. Moreover, wait times for future deliveries may stretch for more than six months -- or longer. And that's why Wall Street expects Nvidia's revenue to double next year to $90 billion.
All this means it might be time for Nvidia to split its stock. But even if it doesn't, investors should keep a close eye on this semiconductor giant.
