What Nvidia’s stock split means for investors

The fact that investors tend to respond positively to splits is more of a psychological phenomenon than one rooted in anything fundamental, says Sam Stovall, chief investment strategist at CFRA.

“People would rather buy 16 shares at $20 than four shares at $80, even though it’s the same thing: it’s just human nature,” he says.

Additionally, a stock split announcement tends to coincide with strong recent financial performance and could indicate that the company thinks more is on the way.

“This sends two messages: first, that they want small retail investors to participate in the rally, and second, that the company itself has confidence in its own earnings projections in order to keep the price high,” said Stovall.

Although investors tend to view stock splits favorably, it should be noted that they do not change the underlying fundamentals of a stock.

A company doing a spinoff simply issues additional shares to current shareholders based on the number of shares those individuals own. In a 2-for-1 split, investors receive two shares for every one they own. Under Nvidia’s upcoming 10-for-1 split, someone who owned one stock would wake up on June 10 with 10 shares.

Of course, as the term “split” implies, the stock price is divided by the number of new shares issued. Let’s say you own a $1,000 stock. After a 2-for-1 split, you would own two $500 shares. A 10-for-1 split would result in 10 $100 shares.

“Earnings per share, price-to-earnings ratio, dividend yield all remain the same,” says Stovall. “The day after the split, you will not notice any changes in your portfolio except that the price and number of shares have changed.”

Although falling stock prices have historically made it easier for retail investors to buy stocks, this is no longer a major problem. Virtually all major online brokerages allow their clients to trade fractional shares, meaning you can buy Nvidia stock for $10 at a time, regardless of the stock price.

In other words, if a split makes you want to hold a stock, you should also like the fundamentals. After all, it’s metrics like corporate earnings growth that ultimately determine stock prices.

Lately, the financial reports coming out of Nvidia have been quite spectacular. The company reported a 262% year-over-year increase in revenue during its fiscal first quarter, marking the third consecutive quarter with growth of more than 200%.

“Nvidia keeps blowing analyst projections over the past year,” Stovall says. “Even as analysts readjust their estimates, Nvidia continues to outperform.”

Past performance does not guarantee future results. To determine whether to add Nvidia, or any other stock, to your portfolio, consider the company’s potential to grow its business and increase earnings in the future.

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