Source: Zhitong Finance

chip manufacturer$NVIDIA (NVDA.US)$A stock split is planned after a sharp rise in the stock price, which may attract the interest of more retail investors, and at the same time pave the way for the stock to be included in the Dow Jones Industrial Average.

Nvidia shares surged 10% last Thursday, after the company announced results and guidelines for the first fiscal quarter that exceeded expectations, announced a “1 split of 10” on the stock, and also increased its quarterly dividend by 150%.

Nvidia is the latest major US company to announce a stock split in recent years. Previously$Amazon (AMZN.US)$,$Alphabet-A (GOOGL.US)$und$Tesla (TSLA.US)$Stock splits were also announced separately. Nvidia itself also carried out a 1:4 stock split in 2021.

Analysts said that for Nvidia, the third-largest US company by market capitalization, a stock split could spark more interest from retail investors. So far, the chipmaker's stock price has more than doubled in 2024.

Stock splits became a catalyst for growth

Although the stock split itself does not change the stock's valuation, market analysts say the reduction in the value of each share has attracted retail investors. Compared with institutional investors with strong financial resources, individual investors often trade on a smaller scale due to limited capital.

“Stock splits may be the biggest catalyst for continuing to attract retail capital,” said Marco Iachini, senior vice president of Vanda Research.

Thanks to the boom in artificial intelligence, Nvidia became the most popular stock for retail investors over the past year.

According to Vanda's report, Nvidia has the highest weight in the average retail trading portfolio at 9.3%, followed by Apple (9.2%) and the S&P 500 ETF (7.8%). A year ago, Nvidia accounted for 4.2% of the average portfolio.

Retail traders' interest in Nvidia has waned recently, though.

According to the latest weekly data, the total retail capital inflow to Nvidia within 5 days was US$278.3 million, down from the peak of US$576.8 million in March.

Ben Laidler, a global market strategist at digital brokerage firm eToro, said that while many retail investors can buy stocks in small amounts, not all such investors have this opportunity. Laidler said this made Nvidia's stock price “a growing obstacle.” The stock recently traded at around $1,060.

Nvidia's spin-off will take effect on June 7. “Given the sharp rise in the company's stock price in recent years, the stock split is aimed at making it easier for employees and investors to obtain ownership of shares,” Nvidia said in a paper on the stock split.

Companies that announce stock splits often outperform the market. According to a February analysis report by Bank of America Global Research, the stock prices of companies that announced stock splits rose by an average of 25.4% over the next 12 months, while the S&P 500 index rose 11.9%.

But stock splits alone are unlikely to overcome the many other factors that may affect stocks. Shares of Amazon and Alphabet fell sharply in 2022 as soaring US interest rates generally put pressure on the stock market, even though both companies announced stock splits that year.

According to data from Howard Silverblatt, senior analyst at the S&P Dow Jones Index, the S&P 500 stock companies have carried out 31 stock splits since 2020. That's far less than the beginning of this century and the end of the 1990s.

Expected to be included in the Dow

The stock split could make Nvidia more likely to be included in the Dow Jones Industrial Average.

The Dow Jones Industrial Average, which consists of 30 companies, is a price-weighted index, and Nvidia's current price is double that of the Dow's largest weighted stock.

Based on last Thursday's price calculation, Nvidia's stock price will drop to around $104 after the stock split. This would make it the 21st-ranked stock among the Dow's constituent stocks, below$Merck & Co (MRK.US)$, higher than$Disney (DIS.US)$.

After Amazon's stock split in 2022, the market also speculated that the stock would be included in the Dow. Earlier this year, Amazon was included in the Dow.

Art Hogan, chief market strategist at B. Riley Wealth, said, “Nvidia certainly has all the conditions to eventually become a component of the Dow: a strong reputation, a history of continuous growth, investor interest, and its industry representation in the wider market.” “The price of $100 will make the initial calculation easier,” he added.

A S&P Dow Jones Index spokesperson said the company would not comment or speculate on the increase or decrease of the index.

Referring to the Dow's compilation method, she said, “A stock is usually only included if the company has a good reputation, shows continuous growth, and attracts a large number of investors,” and that the Index Committee “evaluates the stock price when considering inclusion in a company.”

Editor/jayden