Is It Too Late to Buy Nvidia After Its Stock Split?

Everyone who has been saying that Nvidia‘s (NASDAQ: NVDA) share price would plunge just saw their prediction come true. But not in the way they expected.

Nvidia conducted a 10-for-1 stock split after the market close on Friday, June 7, 2024. Its share price at the market open on Monday was roughly 10% of the previous closing price.

The stock has soared nearly 30% since Nvidia announced its stock split during its first-quarter update on May 22. Is it too late to buy Nvidia stock after its split?

An easy answer

There’s an easy answer to this question: It’s absolutely not too late to buy Nvidia stock. Why is this answer so easy? The stock split changes nothing about the company’s business.

A stock split does two things. First, it increases the number of outstanding shares. In Nvidia’s case, the number of shares jumped tenfold. Second, this increase lowers the share price by a proportional amount.

Did you want to buy Nvidia before the stock split because of the skyrocketing demand for its graphics processing units (GPUs)? Have you been interested in the stock because of the prospects for its forthcoming Blackwell platform? Those reasons for buying remain intact. The only difference between now and before the stock split is that Nvidia’s share price is much cheaper.

Granted, it’s possible that Nvidia’s shares could fall further after the big surge leading up to the stock split. On the other hand, the stock’s momentum could accelerate as retail investors who were previously on the sidelines because of the sky-high share price start buying Nvidia.

A more difficult answer

Now for a more difficult answer to the question. The optimal time for buying Nvidia could now be past for reasons unrelated to the stock split.

The demand for Nvidia’s chips remains exceptionally strong. The company’s sales and profits continue to jump through the roof. However, some would argue all of this is already baked into Nvidia’s share price.

The stock trades at nearly 71 times trailing-12-month earnings and almost 47 times forward earnings. Those valuation metrics reflect 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 especially attractive.

Is there anything that could realistically derail Nvidia’s growth? The answer to this question is a resounding “yes.” Other chipmakers are scrambling to challenge Nvidia’s market dominance, and several of the company’s biggest customers are also developing their own custom chips in an effort to reduce their dependence on Nvidia.

The Pelosi strategy

If you want an opportunity to profit from Nvidia but have concerns about its growth, there’s 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 at least a year out. The call options give him the right (but not the obligation) to purchase shares of Nvidia in the future. These options have strike prices that are deep in the money (well below the share price at the time the options were bought). This means their price correlates highly with changes in Nvidia’s share price.

Importantly, this approach lowers Pelosi’s risk. He doesn’t have to put up as much money since buying call options is less expensive than buying the corresponding number of Nvidia shares that those options give him the right to purchase.

Investors should still be bullish about Nvidia to employ the Pelosi strategy. The good news is that there’s reason to be optimistic about the stock and the business that has nothing to do with its recent stock split.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $740,690!*

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

See the 10 stocks »

*Stock Advisor returns as of June 10, 2024

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

Is It Too Late to Buy Nvidia After Its Stock Split? was originally published by The Motley Fool

Source link

Leave a Reply