- Nvidia’s share price set to fall 90% on Monday
- The AI chip giant is undertaking a 10-for-one stock split
- It could make the stock more appealing to a broader group of investors
- How stock splits work in practice
Dan Coatsworth, investment analyst at AJ Bell, comments:
“Brace yourself: Nvidia’s share price will fall by 90% on Monday 10 June. Don’t panic when this happens – the hype around AI hasn’t disappeared and investors haven’t suddenly dumped the chip giant in unison.
“It’s the result of a neat little trick used by Nvidia to make its shares more affordable to investors who can only afford small sums. This includes its staff who use some of their salary to buy stock each month in a company share scheme.
“Nvidia is giving nine free shares to everyone who owned a share at the market close on 6 June. Each investor will have 10 times as many shares without having to put their hand in their pocket to buy more. Nice perk if you can get it, but what’s the catch?”
How stock splits work
“By increasing the number of shares in issue tenfold, the value of each share will fall by 90%. For example, Nvidia is currently trading around $1,200 per share. Based on that price, the shares will trade at $120 on Monday when the stock split has been completed. The total market value of Nvidia as a business won’t instantly change because of this action, only the value per individual share.
“The market value of a company is calculated by multiplying the number of shares in issue by the share price. Nvidia is currently worth approximately $3 trillion. As the number of shares in issue is now increasing tenfold, the share price needs to be altered to achieve equilibrium with the market valuation – Nvidia won’t suddenly be worth $30 trillion just because the company decides to fiddle with the share count.
“Put another way, someone with five shares in Nvidia would have an investment worth $6,000 based on the current $1,200 price. They will qualify for 45 new shares and get them for free, meaning they will have 50 shares in total. Once the share price adjusts on Monday, 50 shares at $120 each will be worth $6,000 in total – so no change to the current value of the pre-split investment.
“On Monday 10 June, some financial data systems might show a 90% fall in the share price versus Friday 7 June’s closing price, hence why there is the potential for some investors to be shocked when they look at the risers and fallers list for the US stock market, particularly if they aren’t aware of Nvidia’s actions. This data discrepancy will be temporary until manual adjustments are made by each data system.”
What could this mean for Nvidia going forward?
“Playing around with the share price by making technical adjustments is a psychological trick. It’s a classic technique that has been adopted by Apple and Tesla, among others, many times over the years.
“After all, not everyone can afford to spend $1,200 on a single share, and many people would baulk at the idea of a stock costing that much. At $120, it’s a different conversation.
“Someone who puts money into their ISA or pension each month might find their regular contributions easily cover a handful of shares at the lower price. Everyone is talking about AI and Nvidia continues to churn out good news, so we could feasibly see this stock on more investors’ shopping lists because of the stock split.
“In theory, the more people able to afford Nvidia’s shares, the bigger pool of buyers. Therefore, while the share price might undergo a sharp correction for technical reasons on Monday, it’s feasible to suggest the split will attract more people who will bid up the shares. The knock-on effect could be an increase in the overall value of Nvidia. There is no guarantee this will happen but it’s a scenario to consider.
“This is all well and good, but investors must not automatically assume that Nvidia will remain a surefire winner on the stock market. Its shares have already had a stellar run – up more than 725% since the start of 2023 – which shows that the market has already priced in a significant amount of good news. Yes, AI is being embraced by so many industries, but Nvidia is not the only player in town. Plenty of other companies are upping their game in the fight for a slice of the pie.
“There is also potential interference from the powers that be. Reports that the US Justice Department and Federal Trade Commission are moving forward with antitrust investigations into the dominance of Nvidia, OpenAI and Microsoft in the artificial intelligence industry is something to watch closely.
“An industry taking the world by storm is naturally going to attract attention, good and bad. With clear winners in the AI space, the authorities will want to ensure there is fair competition. Therefore, investors will need to consider the prospect of tighter regulation and its potential impact when they pay lofty valuations for many industry-leading firms, even if they have more than enough cash on their balance sheets to fund any fines.
“Ultimately, there are plenty of risks to Nvidia from an investment perspective and anyone considering its shares should think about what could go wrong as well as go right.”
