Financial Services Association, May 24 — On Thursday, against the backdrop of the overall weakening of the US stock market, Nvidia's performance was outstanding, surging 9.3% throughout the day and continuing to reach record highs. Earlier, the company had just released an excellent financial report after the market on Wednesday — revenue, profit, and Q2 guidance completely surpassed market expectations. At the same time, the company also announced the latest stock split plan for 1 split of 10.

In response, many industry insiders said that even without mentioning the impressive Q1 earnings figures, the stock split plan announced by Nvidia alone may have many benefits for the future market prospects of this third-ranked US stock giant by market capitalization:

The plan is likely to attract more retail investor interest while potentially paving the way for the company to be included in the Dow in the future.

Although the stock split itself will not change the stock's valuation, the reduction in the price per share may attract more retail investors. Compared with well-funded institutional investors, retail investors tend to trade less due to limited capital.

Marco Iachini, senior vice president of Vanda Research, said, “The stock split may be Nvidia's biggest catalyst for continuing to attract retail capital.”

The benefits of stock splitting are obvious

In fact, with its current status as a “trendsetter” in the AI boom, Nvidia has become the most popular stock among retail investors over the past year.

Vanda said in a report released on Wednesday that the stock currently has the highest weight in the average retail portfolio, reaching 9.3%, followed by Apple's 9.2% and the largest US stock ETF, the SPDR S&P 500 ETF (SPY), 7.8%. By comparison, a year ago, Nvidia's share of the average retail portfolio was only 4.2%.

However, since Nvidia's stock price has risen too fast and too high over the past year, retail traders' interest in the stock has actually slowed. According to the latest weekly data, the total five-day rolling capital inflow of retail traders to Nvidia was US$278.3 million, which is far below the peak of US$576.8 million in March.

Ben Laidler, a global market strategist at digital brokerage firm eToro, said that although many retail investors can buy stocks in pieces so they don't have to worry about how high or low the stock price is, not all retail investors have this opportunity. Laidler said this has turned Nvidia's high share price into a “growing obstacle” for the stock. Nvidia closed at the latest price of around $1,040 on Thursday.

AJ Bell investment analyst Dan Coatsworth also pointed out that Nvidia's stock split, which took effect on June 7, “should attract retail investors, even though the company's market value has not actually changed.”

In fact, in a document answering “frequently asked questions” about stock splits, Nvidia also stated, “Given the sharp rise in the company's stock price in recent years, the purpose of the stock split is to make it easier for employees and investors to obtain shares.”

Judging from past experience, companies that announce stock splits are often actually more likely to outperform the market. According to an analysis by Bank of America Global Research in February of this year, the stock price of the company that announced the split will rise by an average of 25.4% over the next 12 months, while the average increase in the S&P 500 index is only 11.9%.

Of course, stock splitting alone is clearly not a “panacea.” In 2022, due to the overall impact of soaring interest rates on the stock market, Amazon and Google's parent company Alphabet experienced a sharp drop in stock prices, even though both companies announced stock splits this year.

It is easier to be included in the Dow in the future

As far as Nvidia is concerned, another benefit of the current stock split is that it will hopefully make it easier to be included in the Dow, the oldest blue-chip index on Wall Street.

The Dow Jones Industrial Average, which consists of 30 companies, is a price-weighted index, and Nvidia's high stock price has actually become a major obstacle to its inclusion: Nvidia's stock price of over $1,000 will be double that of the current Dow's most weighted stock.

Based on the stock price as of Thursday's close, Nvidia's price per share will drop to around $104 after the spin-off. This price is only moderate for the Dow: it currently ranks 21st among the Dow's constituent stocks — lower than Merck and higher than Disney.

After Amazon's spin-off in 2022, there was similar speculation in the market about including it in the Dow. Earlier this year, Amazon was officially included in the Dow — this is one of only three “tech giants” currently within the Dow (the other two are Microsoft and Apple).

Art Hogan, chief market strategist at B. Riley Wealth, said, “Nvidia definitely met all the requirements to eventually become a component of the Dow: a strong reputation, a history of continuous growth, investor interest, and its industry representation in the broader market. A stock price of around $100 will make the initial stock index calculation easier when it is included.”

A spokesperson for S&P Dow Jones Indices, which is responsible for compiling the Dow, recently said that the company will not comment or speculate on the increase or decrease of the index.

Referring to the Dow's preparation method, she said, “Normally, only when the company has a good reputation, shows continuous growth, and is concerned by many investors, will it be newly included.” She also mentioned that the Index Compilation Committee evaluates stock prices when considering inclusion in a company.

edit/emily