As an Nvidia investor or someone considering buying shares, you may be wondering about the company‘s 4-for-1 stock split in July 2021. Why did Nvidia decide to split its stock, and what effect has it had? This guide will walk you through everything you need to know.
A Booming Stock Price Precedes the Split
First, let‘s set the stage leading up to Nvidia‘s announcement of a 4-for-1 stock split on May 21, 2021. Take a look at the company‘s stock price growth in the 3 years prior:
| Year | Opening Price | Closing Price | % Change |
|---|---|---|---|
| 2018 | $194.11 | $127.88 | -34.2% |
| 2019 | $127.96 | $247.77 | +93.7% |
| 2020 | $250.59 | $501.70 | +100.2% |
As you can see, Nvidia stock absolutely soared heading into 2021. Two massive back-to-back yearly gains stemming from booming sales of graphics cards for video gaming and artificial intelligence computing in data centers.
By early 2021, shares were crossing $500 and even briefly eclipsed $600 in April 2021. Now trading at over 3 times its price just 3 years earlier, Nvidia stock had clearly become quite expensive for many retail investors.
Why Nvidia Felt A Stock Split Was Necessary
With the share price rising meteoricly, you can imagine fewer investors could afford to buy individual shares of Nvidia. This reduced accessibility became a problem the company wanted to address.
In a 2021 interview, Nvidia CEO and founder Jensen Huang explained:
"Our stock price has risen a lot…that cuts a lot of our employees off from being able to buy it. We‘d like to spread it out a little bit so more people have access."
In other words, Nvidia wanted to keep its stock from becoming only attainable by institutions and wealthy shareholders. The 4-for-1 split aimed to lower the share price enough to enable more individual investors and employees to purchase it.
Simultaneously, Nvidia knew it wasn‘t immune to economic downturns. Remember, as recently as 2018 the stock lost over 30% of its value. By splitting while prices peaked, Nvidia hoped to attract more shareholders to boost liquidity. This way if another downturn emerged, panic selling would less likely crash the stock since ownership would be more diverse.
Comparing Presplit and Postsplit Prices
To see firsthand the impact of the 4-for-1 split let‘s analyze Nvidia‘s share price before and after. July 19, 2021 marked the last day of trading before the split took effect, with shares at $197.18.
Fast forward to the first day of postsplit trading on July 20, 2021. The stock opened at $169.53 before closing slightly up at $171.01.
Accounting for the ratio, the math checks out. $197.18 / 4 = ~$49 per share. So the translated postsplit open and close prices make sense compared to the last presplit close.
We‘ll use one more day, August 5, 2021, to see the longer term impact. Here was Nvidia trading 22 days after the split compared to July 19:
| Date | Closing Price | Translate to Presplit | % Change |
|---|---|---|---|
| Aug 5, 2021 | $195.90 | $195.90 * 4 = $783.60 | +297.6% |
| July 19, 2021 | $197.18 | $197.18 | – |
As you can see, based on translating the postsplit prices back to presplit levels, Nvidia stock rose nearly 300% when accounting for the 4 lower-priced shares now available.
So from this simple analysis, the split achieved its purpose by:
- Making the stock more affordable and accessible with the now lower nominal share price of under $200
- Attracting investor enthusiasm and demand to drive up the price
Evaluating Postsplit Trading Trends
In the first few months after splitting, Nvidia continued riding positive momentum with strong earnings reports and bullish guidance. However, high inflation and rising interest rates put pressure on tech stock valuations moving into 2022.
Nvidia dealt with inventory issues and slowing gaming/consumer demand as well. Its stock peaked around $350 in late 2021 before sliding below $130 in July 2022. Shares have recovered some but remain volatile during a questionable economic period.
Many factors influence stocks outside company control. But analyzing a few key metrics sheds light on how Nvidia has performed since making shares cheaper through splitting:
Share Price
- Peaked at $389 on 11/22/2021, representing nearly $1,556 presplit
- Bottomed at $108.13 on 7/1/2022, representing $432.52 presplit
Market Capitalization
- Added nearly $300 billion since splitting by late 2021 peak
- Recently around $320 billion, down from over $800 billion in Nov 2021
Trailing 12 Month Earnings Per Share
- Peaked at $4.44, but now $1.09 over the past year
P/E Ratio Valuation
- Consistently elevated between 60x – 125x past year
- Currently around 75x compared to average 22x for S&P 500
The data indicates while well off its highs, Nvidia remains a company priced for significant growth. Investors appear confident in its long-term prospects.
But remember, today‘s stock price and company trajectory look much different than in mid-2021 when Nvidia announced its split. Prepare for future volatility even as AI, gaming, cloud computing and the metaverse drive expanding opportunities.
The Bottom Line for Investors
Stock splits don‘t inherently change a company‘s value. However, by making shares more attainable through dividing up ownership, positive demand shifts can emerge. At least in the short term.
This has held true for other hot tech stocks like Apple, Tesla and Amazon which have all split amidst huge runs. Retail enthusiasm initially surges as individuals pour into a newly discounted stock.
In Nvidia‘s case, its 2021 split helped accelerate an already phenomenal 3-year climb. But don‘t conflate the split itself with performance. Over the longer term, corporate execution and market dynamics dictate direction.
Still, splits signal management‘s confidence. And they open the door for more investors to buy shares. Just beware of assuming past trends guarantee future gains.
At nearly $300 billion in value today, Nvidia remains a Wall Street darling. The question is can it sustain altitude at over 70x earnings even if growth moderates. As with any stock, know what you own and why for investment success.
