Nvidia is executing its 10-for-1 stock split tomorrow. History says artificial intelligence (AI) stocks will do it next (hint: it might surprise you).

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Nvidia has completed five stock splits in the past, and shares have performed poorly since then.

Nvidia (NVDA 5.16%) It will complete the 1-for-10 stock split after the market closes tomorrow. This distribution comes after a sharp increase in prices. Nvidia has returned 205% over the past year and 580% over the past three years, with excitement around artificial intelligence the main reason for these gains.

What does the split mean for investors? Shareholders will get nine additional shares for each share held. The stock will begin trading on a split-adjusted basis on Monday, June 10. Importantly, the distribution will not affect the value of the company nor will it change the investor's stake in the company.

The big question is: What happens after a stock split? Of course, there's no way to know for sure, but we can make an educated guess by examining Nvidia's performance since its last stock split.

History says that Nvidia stock is headed for a steep decline.

Nvidia has completed five stock splits since its IPO in 1999. After these events, shares generally declined (often substantially) over the next 12 months and 24 months, as shown in the chart.

Date of stock split

Type of stock split

Return (after 12 months)

Return (after 24 months)

July 20, 2021

4 for 1

(4%)

145%

September 11, 2007

3 for 2

(70%)

(53%)

April 7, 2006

2 for 1

1%

(6%)

September 12, 2001

2 for 1

(72%)

(49%)

June 27, 2000

2 for 1

28%

(52%)

Average

(23%)

(3%)

Data source: YCharts.

As shown, Nvidia stock fell an average of 23% during the 12-month period following the previous stock split, and the stock was still down an average of 3% 24 months later. In other words, history says Nvidia is headed for a steep, long decline.

But there's a big asterisk by that statement: Four of the last five stock splits have occurred near recessions. In particular, the US economy was in recession from March 2001 to November 2001, and from December 2007 to June 2009. These economic downturns triggered bear markets with disastrous consequences for the stock market, so Nvidia was naturally dragged down.

Importantly, while the shares were initially down, investors still underperformed if they bought the shares when the previous stock split took place. The chart provides details.

Date of stock split

Type of stock split

Return (since stock split)

July 20, 2021

4 for 1

527%

September 11, 2007

3 for 2

14,580%

April 7, 2006

2 for 1

24,840%

September 12, 2001

2 for 1

40,100%

June 27, 2000

2 for 1

42,650%

Data source: YCharts.

Going forward, Nvidia's performance depends primarily on its revenue and its ability to grow revenue, and investors have good reason to be bullish.

Nvidia is the market leader in artificial intelligence chips.

The bull case for Nvidia builds on its leading position in the artificial intelligence (AI) economy. Nvidia graphics processing units (GPUs) are the standard bearer in accelerated computing, a discipline that combines specialized hardware and software to accelerate data center workloads such as AI applications. in fact, The Wall Street Journal It was recently reported that “Nvidia's chips dominate all the latest AI systems, giving the company over 80% market share.”

Dominance in the GPU market has allowed Nvidia to branch out into adjacent data center product categories, including central processing units (CPUs) and networking equipment, as well as subscription software and cloud services. CEO Jensen Huang sees this evolution as a key competitive advantage. “We literally build the entire data center,” he told analysts. “This deep intimate knowledge across the entire data center scale is fundamentally what sets us apart today.”

As shown in the chart, Nvidia has put together a series of truly impressive financial reports. This trend continued in the first quarter. Revenue rose 262% to $26 billion on strong data center sales growth driven by demand for AI products. Meanwhile, gross margin increased 12 percentage points, and non-GAAP (generally accepted accounting principles) net income rose 462 percent to $15.2 billion.

Nvidia has grown revenue and non-GAAP net income at a triple-digit pace for four consecutive quarters.

Going forward, Nvidia will inevitably lose momentum at some point, but the company will have a powerful tailwind at its back for years to come. According to Grandview Research, spending on artificial intelligence hardware, software and services is expected to grow 36.6 percent annually through 2030.

Somewhat surprisingly, Nvidia stock trades at a discount to its historical value.

Some investors may be concerned that Nvidia is overvalued, given that shares have tripled over the past year. But earnings have actually grown faster. Remember, non-GAAP net income grew 462% in the first quarter. This means that the price-to-earnings ratio is falling.

Additionally, Wall Street expects Nvidia to grow earnings per share by 38% annually over the next three to five years, and the stock currently trades at 70 times earnings. This gives a PEG ratio of 1.8, a significant discount to the three-year average of 3.2. In short, Nvidia's shares are trading at a cheaper-than-average price despite the extraordinary price gains of the past year.

I will close with a quote from Morgan Stanley Analyst Joseph Moore: “Bottom line, we think Background AI exposure warrants exposure despite all the hype — and Nvidia is the most obvious way to get that exposure.”

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