Should You Buy Nvidia Before the Stock Split? | The Motley Fool (2024)

Don't look now, but Nvidia (NVDA 4.89%) stock is soaring again.

Shares of the leading AI chip maker are getting another boost after a strong first-quarter earnings report on May 22 and the surprise announcement of a 10-for-1 stock split.

Coming into the earnings report, there were some signs that the booming AI stock had run its course. Billionaire investors like Stanley Druckenmiller, who capitalized on the earlier surge in Nvidia shares, had begun selling the stock, saying that the upside potential in Nvidia stock had already been captured.

Nvidia shares even fell through much of April, losing 10% on April 19 as a broader scare among AI stocks led to a widespread sell-off, leading some to believe that a bubble in the AI sector was starting to burst.

However, investors who held through that volatility were rewarded when Nvidia stock soared on its recent earnings report, climbing 9.3% on May 23 and adding another 11% over the following days as the company easily beat estimates, touted strong momentum, and announced the stock split, which is set to go into effect on June 10.

With the 10-for-1 split coming down the pike, it seems like an obvious question for investors who don't already own the stock or are considering adding some more: Should you buy Nvidia stock before the split?

Let's take a look at some of the key factors investors should be considering in order to make that decision.

What the stock split means for Nvidia

Stock splits tend to attract a lot of attention among retail investors, but before you dump your life savings into Nvidia, it's important to understand what the split actually means for the stock.

A stock split doesn't change the fundamentals of a business. A stock split is a relatively simple process of splitting the company's "pie" into more pieces. Investors end up with more shares, but those shares are worth proportionally less. In the case of Nvidia's stock split, investors will own 10 times as many shares as before, but the shares will only be worth one-tenth of what they were before the split.

While stock splits don't change anything for the business and only affect the share price nominally, they have a positive connotation in the stock market. Some of that may be a simple misunderstanding about what a stock split does, but part of the reason is that a stock split acts as a milestone for a stock's growth and triggers interest in the stock. It's a way of resetting the share price both in actuality and psychologically, preparing it for another run-up.

In the case of a stock like Nvidia, a 10-for-1 split also sets it up to possibly become a component of the Dow Jones Industrial Average, as its current price of around $1,100 effectively disqualifies it from inclusion in the Dow because it's a price-weighted index and Nvidia's high price would distort the index.

A stock split also occurs after a stock has made sufficient gains, meaning it's representative of successful companies. Laggards don't need to split their share prices because they never gain enough to warrant. A lower share price also makes the stock more affordable for retail investors, bringing in more newer investors.

There's also some evidence that, on average, stock split stocks tend to outperform the S&P 500 over the next year. According to research from Bank of America, stocks that split have delivered an average of 25% total returns in the following 12 months, compared to just 12% for the S&P 500.

However, that's far from an ironclad rule, as 30% of those stock-split companies saw their share price drop over the ensuing year. For Nvidia, it seems like the stock split announcement is helping to move the stock higher for now.

Should you buy Nvidia stock before the split?

It's difficult to predict short-term movements in stock prices, and the recent run-up in Nvidia's share price brings with it the risk of a "sell-the-news" type of event when the split actually goes through.

However, Nvidia reminds us quarter in and quarter out that the hype around the stock is well-deserved. The chipmaker continues to put up astonishing growth numbers and breeze past Wall Street estimates. And despite the pearl-clutching among some investors about competition and a potential bubble in AI stocks, Nvidia's latest update made it clear that competition is not yet a significant threat in the rapidly growing data center GPU market and that its growth rate remains strong even as comparisons are getting more difficult.

Additionally, Nvidia continues to offer the most comprehensive vision of a generative AI-centric future, and CEO Jensen Huang's portrait of "AI factories," or large clusters for AI training and inference for big tech companies like Tesla and Meta Platforms, is compelling. It's also something no other company can currently come close to matching.

For now, the AI race looks like it's Nvidia's to lose, and the chip titan is showing no signs of slowing. Given that reality, buying Nvidia shares before the stock split looks like a smart move.