My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

NVDA and stock splits

If you own Nvidia (NVDA) shares, you certainly know by now that this outstanding company announced on May 21st(press release here) that it would do a 4-for-1 stock split for holders of NVDA shares on June 21st (“record date”), effective July 20th. It is well understood that stock splits in isolation have no effect on a company’s intrinsic value. Before the days of fractional shares and zero commission trading, one could perhaps argue that a stock split provides an indirect benefit that might enhance market value, by widening the investor base since smaller share denominations would be appealing to a larger number of (small) retail investors. There was perhaps some merit to this argument, weak as it may sound, but this is

nonetheless a moot point today because investors can in fact buy fractional shares of stocks that trade at high prices at economical cost, generally meaning zero commission. Therefore, there is no reasonable explanation as to why a company that announces a stock split should see its market capitalisation change, ceteris paribus. Even so, as you can see in the table to the left, there are on average around 30-40 companies that announce stock splits each month, although this appears to be trending down compared to 2H2020.


NVDA shares increased from $584.37/share the day before it announced its stock split on May 21st to $746.29/share by the record date, an increase of nearly 28% in just over four weeks. Over this same period, the NASDAQ 100 increased by only 5.4%, so the return on NVDA was far superior to the tech-heavy index. As an aside, NVDA hit an intraday high on $835.00/share on July 7th. Since then, reality has set in and the market overall has weakened. NVDA’s stock closed on July 16th at $726.44. If you are wondering what this means from a valuation perspective, NVDA went from a forward P/E pre-split (so mid-May) of 36.9x, to a forward P/E of 47.2x on the record date (June 21st), and currently trades at a price-to-sales (ttm) of 23.8x.


I thought it would be interesting to see how NVDA shares have performed compared to two other well-known companies that announced splits last summer – Apple (AAPL) and Tesla (TSLA).

As you can see in the table above and in spite of the reality that splits do not change book value, both AAPL and TSLA rallied hard post-split, similar to NVDA. In fact, both AAPL and TSLA increased more than NVDA by their respective record dates, and both increased further prior to their effective dates (which is July 20th for NVDA, so pending). And as with NVDA, both AAPL and TSLA significantly outperformed the NASDAQ 100 during this period. However, both companies saw their share prices settle after the effective date of the split. If we look at a three-month period, AAPL shares decreased from $128.41 on the effective date to $108.33 (-16%) on Oct 30th, which was two months later (and three months after the split was announced). TSLA shares decreased from $498.32 on the effective date to $417.13 three months after the split was announced, also -16%. During this three-month period, the NASDAQ 100 was up 3.1%, so both AAPL and TSLA significantly underperformed the index in the first few months following the effective date of their respective stock-splits.


This underperformance in the months following the effective date indicates that the shares were bid up too aggressively during the few weeks following the announcement of the split, and then the shares had to find their “correct” price over the subsequent two or three months. I suspect the same could happen with NVDA, and perhaps we are already seeing this unfold a bit sooner than in the case of AAPL and TSLA. NVDA enjoyed a fairly amazing run in a short period of time, increasing 43% from pre-split announcement to reach an intraday high of $835/share on July 7th, a period of only 30 trading days. However, since then, the stock has settled, perhaps also influenced by a more fragile market. Still, investors might want to be disciplined if wishing to buy NVDA. It has always traded at rich multiples, reflecting its strong history of growth. However, there has been no information since its last earnings release in late May that would cause the stock to run up so much, aside from the questionable benefit of a stock split on the company’s market value.


 

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