Nvidia executed a 10-for-1 stock split. Here’s what happened the last 5 times artificial intelligence (AI) stocks split. | The motley fool

Nvidia (NVDA -3.22%) recently executed a 10-for-1 stock split to restore its stock price, which had risen 725% over the previous 18 months. The driving force behind that performance was the growing interest in artificial intelligence. However, the odds are now stacked against Nvidia. The story goes that the stock is headed for a sharp decline.

Nvidia announced the stock split on May 22, and its share price has since risen 33%. But since 2010, companies have seen their share prices rise an average of just 18.3% over the 12 months following a stock split announcement, according to Bank of America. This implies about a 15% decline for Nvidia over the next 11 months.

Even more troubling, Nvidia has consistently lost momentum following previous stock splits. Here’s what happened the last five times.

Nvidia has generally underperformed following stock splits

Nvidia has completed six stock splits as a public company. The last five splits are listed in the chart below, along with the share price appreciation (or depreciation) over the next six months, one year and two years. In general, Nvidia has underperformed following stock splits.

Data source: YCharts.

As shown above, Nvidia returned an average of 8% over the six-month period following past stock splits. But shares fell an average of 23% during the first year, and they were still down 3% on average after two years. Past performance is never a guarantee of future results, but we can apply that information to the current situation to make an educated guess.

Specifically, Nvidia shares have advanced 4% since the company executed a 10-for-1 stock split on June 7. This implies 4% growth through December 2024. But it implies a 27% decline through June 2025 and a 7% decline through June 2026. However, comparison with the current situation is difficult because the last five stock splits occurred near market crashes.

Most notably, the dot-com bubble became a bear market between March 2000 and October 2002, during which S&P 500 has fallen by 49%. And the subprime mortgage crisis became a resilient market between October 2007 and March 2009, during which the S&P 500 fell 57%.

The fifth stock split also occurred on the heels of a bear market. The S&P 500 fell 25% between January 2022 and October 2022. But Nvidia shareholders were certainly spared major losses by the November 2022 launch of ChatGPT, the AI-generating application that fueled unprecedented demand for Nvidia graphics processing units (GPUs). .

Wall Street analysts see Nvidia as a long-term leader in artificial intelligence

Nvidia specializes in accelerated computing, a discipline that uses special hardware and software to accelerate complex data center workloads such as analytics and artificial intelligence. Nvidia holds more than 90% of the market in data center GPUs and up to 95% of the market in artificial intelligence chips.

One reason for this success is the superior hardware. Nvidia systems regularly set records in the MLPerf benchmarks, which provide unbiased evaluations of AI hardware and software in training and inference use cases. Analysts at Forrester Research Recently wrote, “Nvidia sets the pace for AI infrastructure worldwide. Without Nvidia GPUs, modern AI would not be possible.”

Another reason for this success is the extensive software. Nvidia’s CUDA programming language makes it easy for developers to train AI models and build GPU-accelerated applications. The CUDA platform includes hundreds of libraries and software frameworks that simplify development. No other chip maker offers a comparable ecosystem of supporting software.

Finally, Nvidia also offers data center hardware beyond GPUs, including AI-optimized central processing units (CPUs) and networking equipment. The former is on its way to a multi-billion dollar product line, and the latter is already a $12 billion business. Additionally, Nvidia complements its hardware portfolio with subscription software and cloud services that further assist developers in building and running AI applications.

In short, Nvidia offers a complete accelerated computing platform, which gives the company an almost insurmountable competitive advantage. Consider the following comment from Wall Street analysts.

• Harlan Sur in JPMorgan Chase expects Nvidia to stay one to two steps ahead of competitors due to its comprehensive strategy, large CUDA developer ecosystem and rapid product innovation.
• Jim Kelleher at Argus recently wrote, “Nvidia’s expertise, market leadership and continued investment in new technology puts it several generations ahead of its rivals and gives it a sustainable competitive advantage.”
• Angelo Zino at CFRA recently wrote, “On the software side, [Nvidia’s] The competitive gap looks stronger than ever given his ability to control the entire pack.”
• Brian Colello at The morning star says “Nvidia not only has a hardware advantage, but benefits from high customer switching costs around CUDA, making it impossible for another GPU vendor to emerge as the leader in AI training.”

Nvidia stock is worth buying, despite its tendency to fall after stock splits

Nvidia has reported impressive financial results in recent quarters. The chart below provides details on revenue and non-GAAP net income growth.

Nvidia has grown revenue and non-GAAP net income at a triple-digit pace in the past four quarters. Note: Q1 of fiscal year 2025 ended on April 28, 2024.

Going forward, Wall Street analysts think Nvidia’s earnings per share will grow 32% annually over the next three to five years. That valuation puts the current valuation of 74 times earnings somewhere between reasonable and expensive.

Personally, I think growth-focused investors should have a position in Nvidia. Anyone who lacks such a position should consider buying some shares today, provided they are comfortable with the risks. Nvidia has historically performed poorly following stock splits, and shares could fall if the company fails to meet Wall Street’s lofty earnings expectations.