Everyone has spoken Nvidia‘s (NASDAQ: NVDA) stock prices will plunge just to see these predictions come true. But not as expected.
Nvidia conducted a 10-for-1 stock split after the market closed on Friday, June 7, 2024. The stock price in the open market on Monday was about 10% of its previous closing price.
The stock is up nearly 30% since Nvidia announced a stock split during its first-quarter update on May 22. Is it too late to buy Nvidia stock after the split?
The answer is simple
There is a simple answer to this question: Absolutely not it’s too late to buy Nvidia stock. Why is this answer so easy? A stock split does not change anything about the company’s business.
Stock splits do two things. First, increase the number of outstanding shares. In Nvidia’s case, the number of shares increased tenfold. Second, this increase reduces the share price by a proportional amount.
Are you looking to buy Nvidia before the stock splits due to overwhelming demand for graphics processing units (GPUs)? Have you been interested in the stock due to the prospect of the upcoming Blackwell platform? The reason for the purchase remains intact. The only difference between now and before the stock split is that Nvidia’s stock price is lower.
Of course, Nvidia stock could fall again after the big surge that led to the stock split. On the other hand, the stock’s momentum could accelerate as retail investors who were previously on the sidelines due to the high share price since buying Nvidia.
A more difficult answer
Now for the more difficult answer to the question. The optimal time to buy Nvidia may now have passed for reasons unrelated to the stock split.
Demand for Nvidia chips remains very strong. The company’s sales and profits continue to jump through the roof. However, some would argue all of this has been baked into Nvidia’s stock price.
The stock trades at nearly 71 times trailing-12-month earnings and nearly 47 times forward earnings. The valuation metrics reflect that a lot of anticipated growth. Even Nvidia’s price-to-earnings-to-growth (PEG) ratio of 1.51, based on five-year growth projections, isn’t very attractive.
Can anything realistically hurt Nvidia’s growth? The answer to this question is a resounding “yes.” Other chipmakers are scrambling to challenge Nvidia’s market dominance, and some of the company’s biggest customers are also developing their own custom chips in an effort to reduce dependence on Nvidia.
Pelosi’s strategy
If you want a chance to profit from Nvidia but are worried about its growth, there is another approach. You could call it the “Pelosi strategy” after former House Speaker Nancy Pelosi’s husband, Paul.
Mr. Pelosi has invested in Nvidia by buying deep-in-the-money call options with expiration dates of at least a year. Call options give you the right (but not the obligation) to buy Nvidia stock in the future. These options have strike prices that are deep in the money (below the stock price when the option is purchased). This means that its value is highly correlated with changes in Nvidia’s stock price.
Importantly, this approach reduces Pelosi’s risk. They don’t have to shell out money because buying a call option is cheaper than buying the number of Nvidia shares that the option entitles them to buy.
Investors still need to be convinced about Nvidia to adopt Pelosi’s strategy. The good news is that there are reasons to be optimistic about stocks and businesses that have nothing to do with recent stock splits.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has a position and recommends Nvidia. The Motley Fool has a disclosure policy.
Is It Too Late to Buy Nvidia After the Stock Split? this was originally published by The Motley Fool
