Nvidia shares rose 9% to a record high of over $1,000 on Thursday after reporting another strong earnings report, but the stock is set to fall sharply after the AI chip giant announced a 1-for-10 stock split, making it easier for retail investors to buy the company's shares.
Bank of America analysts, led by Jared Woodward, head of the bank's research and investment committee, described the split as “another big tech company pursuing a shareholder-friendly policy.” Nvidia becomes the fourth of the Magnificent Seven big tech companies to announce a stock split after 2022, Woodward and his team wrote, noting that Google, Amazon and Tesla “are all making their shares more accessible.”
In recent years, with many big tech companies' stock prices exceeding $500, potentially limiting retail investors' ability to buy their shares, big tech companies are looking to make themselves more accessible to non-professional investors. In other words, “big tech companies are getting smaller,” Bank of America said.
History shows that stock splits are bullish
Bank of America sell-side analysts have long been bullish on Nvidia shares, and after Thursday's earnings report, they again raised their 12-month price target for the semiconductor giant, this time to $1,320 from $1,100. If that outlook proves prescient, Nvidia shares could rise another 26%, according to Bank of America's past analysis, and a stock split could also bolster the bullish move.
“Stock splits have boosted returns every decade, including during the early 2000s when the S&P 500 struggled,” Woodward and his team explained.
Specifically, according to Bank of America research, stocks have historically delivered a 25% total return in the 12 months following a stock split, compared to 12% for the S&P 500.
Bank of America also noted that stock splits can spark bull markets even in struggling stocks. They cited semiconductor maker AMD and oil refiner Valero as examples. Both companies saw their shares soar after announcing stock splits despite poor performance before the splits. “Stock splits appear to create upside potential for the market because, on average, gains are more common and larger than losses,” the analysts added.
However, following the lead of the Securities and Exchange Commission, it is important to add the caveat that all mutual funds are required by law to tell investors that “past performance is not indicative of future results.”
Bank of America was also quick to point out that “outperformance is not guaranteed” after a stock split: Companies that announce stock splits still experience a 30% chance of negative returns, and when that happens, they experience a steep average decline of 22% over the following 12 months.
“Stock splits can signal strength in momentum, but companies may struggle in a tough macro environment,” the analysts wrote. “Companies such as Amazon, Google, Tesla and Dexcom struggled in the 12 months following the announcement of their 2022 stock splits as interest rates soared.”
Still, the majority of Wall Street analysts remain bullish on Nvidia stock. The company boasts 48 “buy” ratings, eight “overweight” ratings, six “hold” ratings, and zero “sell” ratings, according to The Wall Street Journal. And because Nvidia is currently on a “one-year cycle,” Huang's announcement that the company will develop a new AI chip within the next 12 months was also the news bulls wanted to hear.
“The godfather of AI, Jensen and Nvidia, delivered yet another quarterly result and guidance that deserves to be hung in the Louvre,” Wedbush tech analyst Dan Ives, a known Nvidia bull, said in a note on Thursday.
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