On May 23, EST, Nvidia announced a 1:10 share split plan. The adjustment will be carried out at the opening of the market on June 10 (next Monday). Nvidia shareholders will receive an additional 9 common shares after closing on June 7 (this Friday). In addition to the stock split, Nvidia's stock price broke through the $1,000 mark in one fell swoop, driven by favorable news that surpassed expectations and dividend multipliers.
Although the stock split itself will not change the stock's valuation, the low stock price lowers the entry threshold for individual investors, and is expected to attract more capital to enter the market and push the stock price higher. Bank of America pointed out in its latest report that in the past, the average return on stocks after the stock split reached 25% after 12 months, significantly outperforming the S&P 500 index.
Bank of America believes that Nvidia's current stock split may set off a wave of US stock splits. In particular, 36 S&P 500 index stocks with stock prices above $500, such as Broadcom, Netflix, and ultra-microcomputers, are expected to become “candidates” for the US stock split.
What is the impact of stock splits on stock prices? Bank of America: Average return significantly outperforms S&P 500
A stock split, also known as a stock “split,” means that a company splits existing stocks with higher stock prices into several shares with lower prices, so that the number of tradable shares can be increased. After the stock is split, shareholders' equity remains unchanged, and the total market value of the company remains the same, but the number of positions held will change.
Although the stock split itself will not change the stock's valuation, the lower price per share may attract more individual investors. Compared with well-funded institutional investors, individual investors tend to trade less due to limited capital. Lower prices can also psychologically make investors feel cheaper.
Nvidia's announcement of a stock split this time will, in theory, reduce the price per share to around 100 US dollars. Analysts believe that although the fundamentals remain the same, the market generally tends to respond positively to stock splits, which is more of a psychological phenomenon. Nvidia's stock split is likely to drive the chipmaker's stock price increase in the short term and boost already enthusiastic investor sentiment.
This is the second time in recent years that Nvidia has split shares. Earlier, in May 2021, Nvidia announced plans to split the stock 1:4. At the time, Nvidia's stock price was around 600 US dollars, and on the eve of the stock split taking effect, Nvidia's stock price rose to a maximum of 835 US dollars.
As far as Nvidia is concerned, the greater significance of its stock split is that it will make it easier for the stock to be included in the blue chip Dow Jones Index. Previously, since Nvidia's stock price was close to 1,000 US dollars, if selected for the Dow, it would cause the index to deviate seriously (the Dow weighted based on stock price rather than market value), but there was no problem after the stock split. The media speculated that Nvidia could be selected as a Dow constituent stock in the second half of this year or 2025.
Furthermore, stock splits have a positive impact on the overall stock price trend. According to a Bank of America research report, whether judging from 3 months, 6 months, or 1 year after the stock split, stocks usually perform better than the general market after a stock split. Since 1980, the average increase in the company's stock price one year after the stock split was 25.4%, significantly outperforming the S&P 500 index's performance over the same period (average increase of 11.9%).
However, stock splitting alone is not a “panacea.” In 2022, due to the overall impact of interest rate hikes on the stock market, the stock price performance of Amazon and Google was still sluggish after the stock split. Furthermore, if a company spin-offs several times in a short period of time, it may also be a warning sign of sale, as frequent stock splits may cause some high-quality investors to sell off this stock.
Nvidia may set off a wave of US stock splits! Who will be next?
In recent years, as US stocks have broken out of the bullish trend, the share price of many large technology companies has exceeded 500 US dollars per share, limiting individual investors' ability to buy to a certain extent. Therefore, these companies are also looking for ways to lower the threshold for buying stocks.
The Bank of America pointed out in its latest report that the Nvidia stock split may start a new trend of US stock splitting, and that high-priced technology stocks such as Broadcom, Netflix, and ultra-microcomputers may all become candidates for the next batch of stock splits.
In its report, Bank of America highlighted 36 companies whose stock prices exceed $500 in the S&P 500 index. The list of 36 potential stock splits covers various industries, with technology companies accounting for the majority.$Broadcom (AVGO.US)$,$Super Micro Computer (SMCI.US)$,$Netflix (NFLX.US)$and$ServiceNow (NOW.US)$Well-known companies such as these are among them. Their stock price performance is strong and market recognition is high, so they have become “observers” for stock splits with great potential.
Also included are online travel giants with shares close to $3,800$Booking Holdings (BKNG.US)$, the stock price is around 3,000 US dollars$Chipotle Mexican Grill (CMG.US)$,$AutoZone (AZO.US)$, and$Eli Lilly and Co (LLY.US)$,$Regeneron Pharmaceuticals (REGN.US)$Wait for pharmaceutical companies.
It is worth noting that although the increase in liquidity and demand after a stock is split, usually favoring higher stock prices, the performance of a company's fundamentals is also critical. Supported by excellent performance and strong stock price trends, stock splits can garner the attention and willingness of more investors to invest, attract more capital to enter the market, and give full play to the advantages of stock splits.
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