Monday kicked off an eventful week in the financial markets, with traders suddenly seeing a very different price for NVIDIA (NASDAQ:NVDA) stock than they were used to. Since NVIDIA is apparently the only company that matters anymore, it’s front-page news — and yet another reason for retail investors to pile into an already piled-on trade.
Just bear in mind that not all news is good news, or for that matter, actionable news. NVIDIA isn’t suddenly a different company than it was last week, and all challenges and opportunities still apply.
The big split, and why it matters
Earlier this year, Walmart (NYSE:WMT) announced a three-for-one stock split. When the split occurred, Walmart’s shareholders suddenly had three times as many shares as they did before, but each share was worth one-third of the previous price.
In other words, Walmart shares suddenly became more affordable after the split. However, the big-box retailer itself didn’t fundamentally change because of the stock split.
In theory, making Walmart’s shares cheaper could make the stock more popular among retail investors. Keep in mind though that the shares are only “cheaper” in dollar terms and not in terms of overall valuation.
In any case, 2024 isn’t all about Walmart and big-box retailers. It’s about artificial intelligence (AI), and the undisputed heavyweight champion of AI-compatible hardware this year is NVIDIA.
While noteworthy, the news of Walmart’s three-for-one stock split is small potatoes when compared to NVIDIA’s stock-split announcement. As part of NVIDIA’s first-quarter fiscal 2025 press release in May, it disclosed that trading on its stock following a 10-for-one stock split would “commence on a split-adjusted basis at market open on Monday, June 10, 2024.”
Hence, NVIDIA stock traded at $122 and change on Monday rather than at $1,220. At long last, NVIDIA’s management made “stock ownership more accessible to employees and investors.”
Accessibility and affordability matter, but is the stock split a good reason to load up on NVIDIA shares now? One might assume that retail traders would jump on the opportunity to fit the stock into their small portfolios.
As a result, some investors might expect NVIDIA stock to head for the moon. However, the market is efficient, and large-scale traders have known about the stock split for a while now. Most likely, they’ve already priced their anticipation of any positive post-split effects into their target price for NVIDIA stock.
There’s also chatter about the stock split possibly making it more likely that NVIDIA will be included in the Dow Jones Industrial Average (DJIA). However, NVIDIA’s juggernaut and market-darling status practically assures Dow inclusion sooner or later.
The NVIDIA stock price is still wrong
I won’t win any popularity contests with this commentary, but NVIDIA stock remains expensive even if it’s more affordable dollar-wise. Checking in on NVIDIA’s stock-split day (Monday), the company was trading at 70.61 times its trailing 12-month earnings using GAAP measurements.
It gets much more extreme if you’re using non-GAAP measurements. Believe it or not, NVIDIA’s non-GAAP, trailing 12-month price-to-earnings (P/E) ratio is 671.6, and the company’s forward P/E ratio is 445.93.
I know why NVIDIA is so richly valued. The company’s revenue isn’t just growing; the rate at which its revenue is growing is also growing.
From a mathematical perspective, it’s awfully hard for a company’s revenue growth to continue accelerating quarter after quarter after quarter. One would think that at some point, buyers of NVIDIA’s AI processors wouldn’t continue to increase the pace of their purchases.
I would call that the “saturation point,” and there’s no telling when it will occur. Of course, no company can be king of the hill in such a lucrative industry without fierce competition nipping at its heels.
As Bokeh Capital Partners founder Kim Forrest put it, “[H]ere’s a crazy idea: maybe some chip designer will come up with an even better way to be useful in the AI ecosystem.”
Actually, that’s not a “crazy idea” at all. It’s a bold idea though, and she may encounter backlash from the NVIDIA stock die-hards. Forrest even dared to doubt that NVIDIA “is going to rule AI forever and ever.” Is it legal to say that in 2024?
I fully understand the enthusiasm surrounding NVIDIA now. It might feel like the chipmaker will rule the AI-hardware roost “forever and ever.” The company’s shares can also more easily fit into a bite-sized portfolio now following the stock split.
On some level, it’s commendable that NVIDIA finally enacted its long-hoped-for stock split. Just consider tempering your enthusiasm with due caution, and don’t assume that NVIDIA’s cheaper shares are actually cheap.