Nvidia investors will receive nine extra shares for every single one they hold. The split should see Nvidia’s share price – which is well beyond $1,000 – shrink by about 90%, but each investor would retain the same total investment value
In certain exceptional situations, a reduced share price can benefit investors.
Take, for example, Nvidia, the chip firm whose stock price has rocketed well beyond $1,000 due to Wall Street’s continued enthusiasm over artificial-intelligence technology. The company recently announced it would carry out a stock split; in early June, each investor will receive nine extra shares for every single one they currently hold.
All things being equal, this split should see Nvidia’s share price shrink by approximately 90%. However, each investor would still have the same total investment value in Nvidia as prior to the split. According to Nvidia, the move is designed to make its shares more affordable for its personnel and additional investors.
A potential investor might be more inclined to buy a stock priced at $100 rather than $1,000, even if some brokers permit the purchase of fractional shares. Moreover, if past behaviour is any indication, Nvidia may see its share prices continue to climb higher than the wider market.
“Historically, stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index,” says BofA Global Research’s investment research committee. Of course, some of this outperformance could be due to the fact that companies typically only consider stock splits after a period of success where their share prices have significantly increased.
However, a stock split doesn’t necessarily guarantee a subsequent rise in price. Take Tesla for example, which experienced a nearly 12% drop in the year following its announcement of a three-for-one stock split on Aug. 5, 2022.
In contrast, the S&P 500 saw an 8% increase over the same period. Tesla was among the 30% of companies that announced stock splits and subsequently saw their share prices decrease in the following year. A few outliers, such as Copart with a 56% increase following its October 2022 announcement, helped boost the overall figures.
However, strategists at Bank of America discovered that the performance advantage for companies announcing stock splits persisted across various market conditions. This includes not only the period from 1990 to 1999, when the US economy was consistently growing, but also from 2000 to 2009, which saw the burst of the dot-com and housing bubbles.
In a BofA Global Research report, the strategists suggested that stock splits could provide a simpler method for companies to benefit their shareholders, as opposed to investing cash into repurchasing their own stock, which may appear costly as stock indexes hover near record highs.
So far this year, eight firms including Walmart and Chipotle Mexican Grill have declared stock splits. This is a decrease from the late 1990s when over 60 companies would regularly announce splits annually.
