It's been a fantastic 2023 thus far for the stock market. The S&P 500 is up more than 7% year to date, and many key indexes are once again notching new all-time highs. This strong widespread performance raises the question: Which stock is most overdue for a stock split?
Granted, there are plenty of candidates thanks to the powerful rally in artificial intelligence (AI) stocks. Nevertheless, I think the answer is clear. Nvidia (NVDA 6.18%) is the stock most in need of a stock split. Here's why.
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Why it's time for Nvidia to split its stock
First things first: Stock splits tend to happen when share prices go up. And boy, oh boy, Nvidia shares soared over the last 18 months. Indeed, the stock is up a remarkable 650% since October 2022. In dollar terms, the share price has risen from $112 to over $875.
And while its skyrocketing share price is certainly a good thing for Nvidia, it does cause a few problems for the company and the appeal of its stock.
First off, many retail investors are turned off by high-priced stocks. Pricey stocks might be out of reach for investors with modest portfolios, or those who can't stomach the thought of a single share of stock costing almost $1,000.
Second, when a company's share price approaches $1,000, it often wants to enact a stock split for another reason: stock-based compensation (SBC).
For many companies, particularly tech businesses, SBC is a critical piece of overall employee compensation. When share prices are high, SBC can become more difficult to fine-tune given how expensive each share is. Accordingly, companies often split their stock to award "more" shares to employees, even if that doesn't translate into larger SBC bonuses.
How likely is Nvidia to split its shares?
If history is any guide, it's quite likely that Nvidia will split its shares soon. The company has enacted five stock splits over its lifetime as a publicly traded company.
The most recent split happened in 2021, when the company split its shares 4-for-1. Prior to the announcement of its split, Nvidia's shares were trading around $560. In the run-up to the split itself, shares increased to over $800.
Is Nvidia a buy now?
For long-term investors, I think there is still plenty of time to buy Nvidia. The AI revolution will play out over a decade or more, meaning Nvidia will reap the benefits of its cutting-edge graphics processing units (GPUs) for years to come.
What's more, Nvidia stock remains affordable despite its lofty share price. For example, its forward price-to-earnings (P/E) multiple is 36, below its three-year average of 43.
NVDA PE Ratio (Forward) data by YCharts
In short, Nvidia might be red-hot, but that doesn't mean the shares will cool down anytime soon. What's more, another stock split could happen in the near future, driving even more retail interest in one of Wall Street's most popular names.
