Nvidia is one of the most talked about stocks in the world right now. It has delivered whopping returns in excess of 3,200% over the past five years thanks to developments in artificial intelligence (AI).
Nvidia designs the chips that enable AI – a megatrend that has captured headlines and imaginations alike in recent years. This has put the wind in the stock’s sails. Nvidia is now the second most valuable company in the world, having overtaken Apple last week (5 June).
If you hold Nvidia stock, you might have seen the company’s share price suddenly change from around $1,200 to $120 on Monday – but this is not as alarming as it might sound. The stock has not crashed. Rather, it underwent a technical event known as a stock split.
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“Companies often perform stock splits to make their stock more accessible to a wider range of investors,” explains Sam North, market analyst at investment platform eToro. “A stock split can reduce the price per share, making it more affordable for individual investors to buy,” he adds.
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We look at what the Nvidia stock split means for investors, how the market has reacted, and whether now is a good time to invest in this Magnificent Seven tech stock.
What is a stock split?
A stock split is when a company divides its existing shares to increase the number of shares available to investors.
Nvidia carried out a 10-1 stock split, which means each share was divided in 10. So, if you previously had 10 Nvidia shares, you will now have 100. However, the value of your overall shareholding will remain the same, as the share price was divided up too.
“When a stock's price gets too high, it can become difficult for some investors to purchase whole shares,” says North. This was the case with Nvidia, whose share price had soared to more than $1,200 before the split.
As well as making a company’s shares more accessible to retail investors, a stock split can boost liquidity. We explore the pros and cons in further detail in our stock split explainer.
How has the market reacted to the Nvidia stock split?
Nvidia has been on a roll in recent years, continually soaring to new heights. But will the stock split facilitate further investment, providing yet another tailwind for the stock?
“Historically, well-performing companies that have conducted stock splits often see continued growth in their stock price, provided they maintain strong operational and financial performance,” says North.
That said, any inflows related to the more affordable share price are likely to come gradually – particularly given that many investment platforms already allow retail investors to access companies like Nvidia through fractional shares.
Commenting on the latest market reaction, Dan Coatsworth, investment analyst at AJ Bell, says: “Nvidia’s actions to make its shares more affordable haven’t yet translated into a new rally in the stock. No-one expected the shares to shoot to the moon simply because of the stock split and it’s impossible to judge the success of the split over such a short period of time.
“Management probably had their eye on the regular investor, someone who puts a small amount into their investment account each month, rather than day traders. As such, greater buying interest could be a slow burn, not an immediate pile-in.”
Derren Nathan, head of equity research at Hargreaves Lansdown, adds that Nvidia’s shares are up by around 5% this week, adjusting for the split.
“That’s not a big move for the company which is up 35% over the last month and more than trebled on a twelve-month view,” he says. With this in mind, “it would be a far push to give credit to the share division for any upside enjoyed so far,” he adds.
Is now a good time to invest in Nvidia?
If you were already thinking about buying Nvidia shares, but were put off by the high share price, Friday’s stock split will be music to your ears.
Retail investors were already able to access the company through fractional shares but these come with some tax risks. As HMRC has made clear, “a fraction of a share does not give the investor the same legal rights as a whole share does”.
Under current rules, HMRC does not allow investors to hold fractional shares in an ISA – although this could be set to change. The Treasury has been working on plans to update the rules ever since chancellor Jeremy Hunt’s 2023 Autumn Statement, but these have been put on hold for now by the general election.
Of course, Nvidia’s market value recently soared to a record high and investing at the top of the market can come with risks. However, if investors continue to buy into the AI revolution, the stock could potentially climb further still. This will also be contingent on Nvidia’s ability to maintain its market share.
Current risks include a potential regulatory clampdown. What’s more, there are concerns that AI is too energy-hungry, and that electricity grids might not be able to cope with the demand. We explore the investment case for Nvidia and Big Tech in further detail in a recent article: “Should you invest in the US stock market and will Big Tech crash?”
