Nvidia Corporation (NASDAQ: NVDA), in Q1 2024, posted a record 262% year-over-year jump in quarterly revenue to $26 billion on the back of its growing data centre business boosted by the Blackwell platform.
Nvidia share prices jumped to record levels on the announcement, hovering above $1,100 apiece on May 28. The chipmaker also decided to execute a 10:1 or 10-for-1 forward stock split in its quarterly earnings report.
The corporate action, scheduled for June 7, will impact the shareholders of Nvidia common stock. Split-adjusted trading will begin on June 10.
A company would typically go through a stock split to improve the liquidity of the shares and make it more accessible to a broader range of investors by slashing the stock price proportionately to the split ratio. The company will have increased its outstanding shares by a fixed multiple without affecting their total dollar value. A stock split doesn't change the company's value or market capitalization.
Moreover, liquidity of shares means the ease with which they can be bought or sold without affecting their intrinsic market price or value. Cash is one of the most liquid assets with universal demand as it can be converted into other assets easily, whereas real estate and similar tangible assets are comparatively illiquid.
Nvidia's 10:1 stock split will increase the total outstanding shares of Nvidia common stocks by ten times while cutting the cost of each share proportionately without affecting the value of investors' holdings. For instance, if you have one share of Nvidia standard stock trading at $1,000 apiece before the stock split, you will end up with ten company stocks, each priced at $100 after the split.
At an around $100 price point, more investors will be able to afford the stocks of the multi-trillion dollar firm. The AI leader's decision to carry out a stock split could mean much more than simply reducing the stock price so that more investors can buy its shares.
The higher number of outstanding shares at lower prices boosts the stock's liquidity, making it easier to trade the asset. Higher liquidity may also reduce the bid-ask spread, the difference between the highest price a buyer is willing to pay for a stock and the minimum price the seller is willing to accept.
The bid-ask spread offers insights into the supply and demand of an asset. A narrow or tighter bid-ask spread means the price action signals high trading volumes and robust demand among investors. Stock splits are seen as bullish signs for firms, especially blue-chip companies, which can renew investor interest and further complement the stock prices.
For Nvidia, its stock split could also mean the company might seek a more significant future growth runway. If true, the stock split may hint at executive-level belief in the company's future growth prospects.
Several stock market indexes, like the Dow Jones Industrial Average, avoid costly stocks since their price fluctuations could have a bigger-than-expected impact on the index. Hence, several companies undergo stock splits to reduce the price-per-share to levels deemed suitable by such stock indexes.
Several brokerages lifted their price targets for Nvidia after the quarterly earnings announcement, with many believing the stock may inch even higher as the stock split nears.
Wedbush analysts wrote that Nvidia is "seemingly hitting the 'fast forward' button," adding that they "see no reason to moderate enthusiasm around NVDA."
"Nvidia is such a unique growth property that investors will continue to support the company's premium valuation multiples," noted Benchmark analyst Cody Acree. He upped his Nvidia price target by $250 to $1,350 a share.
Meanwhile, JPMorgan lifted its target price to $1,150 per share from $850 earlier on a strong demand outlook, while Bank of America set one of the highest price targets at $1,320.
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