For a lot of investors, Nvidia (NASDAQ: NVDA) has emerged because the quintessential artificial intelligence (AI) stock. That is because the corporate’s graphics processing units (GPUs) are the industry standard in accelerating complex data center tasks, resembling training machine learning models and running AI applications.

Nvidia shares have surged 780% because the generative AI application ChatGPT went viral in late 2022. That event triggered a tidal wave of AI infrastructure spending that continues to be constructing momentum, and Nvidia has been one in all the most important beneficiaries. In turn, the stock has develop into a staple of the AI trade.

Nvidia reset its soaring share price in June by conducting a 10-for-1 stock split. Shares have since tumbled about 2%, but history says Nvidia stock can have further to fall.

Stock-split stocks like Nvidia typically outperform the S&P 500

Generally speaking, corporations conduct forward stock splits after substantial share price appreciation, which itself is suggestive of compelling growth prospects and a competitive edge. Corporations that possess those qualities are likely to produce above-average returns for shareholders.

Indeed, Bank of America reviewed data back to 1980 and located a correlation. Corporations that split their stock returned a mean of 25.4% in the course of the 12 months after announcing the split. By comparison, the S&P 500 returned a mean of 11.9% in the course of the same period.

Here’s what that would mean: Nvidia announced its latest stock split after the market closed on May 22, 2024. The stock traded at a split-adjusted $95 per share. History says its share price will increase 25.4% to $119 by May 2025. However the stock already trades at $119 per share, leaving zero implied upside (or downside) over the subsequent eight months.

Nvidia has performed poorly following past stock splits

We can even make predictions about Nvidia’s future performance by reviewing company-specific data. As an example, the chipmaker accomplished five stock splits prior to essentially the most recent one. The chart below shows how the stock performed in the course of the 12 months and 24 months following those five splits.

Data source: YCharts.

As shown above, Nvidia has often performed poorly following stock splits. Its share price has declined by a mean of 23% in the course of the first 12 months and was still down by 3% on average after 24 months.

Story continues

Here’s what that would mean: Nvidia accomplished its 10-for-1 split after the market closed on June 7. The stock traded at a split-adjusted $121 per share. History says its share price will drop 23% to $93 by June 2025. The stock currently trades at $119 per share, so the implied downside is 22% over the subsequent nine months.

Having said that, past performance is rarely a guarantee of future results. Furthermore, many of the stock splits listed within the chart took place inside 12 months of a recession, so Nvidia had little probability of posting positive returns. Going forward, whether Nvidia is an excellent investment will depend on its financial performance and what investors are willing to pay to own shares of the corporate.

Nvidia is the market leader in artificial intelligence chips

Nvidia dominates the marketplace for data center GPUs, chips used to hurry up workloads like AI applications. The corporate accounted for 98% of information center GPU shipments in 2023, essentially unchanged from the prior 12 months, and people GPUs account for greater than 80% of AI chips.

There are two reasons for that dominance. First, Nvidia designs essentially the most powerful GPUs money should buy, and rapid product development keeps its GPUs on the leading edge by way of performance. Second, Nvidia complements its chips with a sturdy ecosystem of software libraries and developer tools called CUDA. The CUDA platform streamlines the constructing of GPU-accelerated applications.

In line with Grand View Research, graphics processor sales are projected to grow at 27% annually through 2030, driven by the proliferation of machine learning and AI. Nvidia’s sales should increase at the same pace, plus or minus a number of percentage points. Nevertheless, earnings may grow a bit faster attributable to share repurchases and potential margin expansion driven by pricing power.

Wall Street forecasts adjusted earnings will increase at 35% annually through fiscal 2027 (ends January 2027). That consensus makes the present valuation of 54 times earnings look tolerable. Investors should consider buying a small position in Nvidia stock today, provided they’re comfortable with volatility and willing to carry their shares for no less than three to 5 years.

Do you have to invest $1,000 in Nvidia right away?

Before you purchase stock in Nvidia, consider this:

The Motley Idiot Stock Advisor analyst team just identified what they imagine are the 10 best stocks for investors to purchase now… and Nvidia wasn’t one in all them. The ten stocks that made the cut could produce monster returns in the approaching years.

Consider when Nvidia made this list on April 15, 2005… for those who invested $1,000 on the time of our advice, you’d have $729,857!*

Stock Advisor provides investors with an easy-to-follow blueprint for achievement, including guidance on constructing a portfolio, regular updates from analysts, and two recent stock picks every month. The Stock Advisor service has greater than quadrupled the return of S&P 500 since 2002*.

See the ten stocks »

*Stock Advisor returns as of September 9, 2024

Bank of America is an promoting partner of The Ascent, a Motley Idiot company. Trevor Jennewine has positions in Nvidia. The Motley Idiot has positions in and recommends Bank of America and Nvidia. The Motley Idiot has a disclosure policy.

Nvidia Stock Split Update: Down 2% Since June, History Says the AI Stock Will Do This Next was originally published by The Motley Idiot