Nvidia's 10-for-1 stock split comes with a caveat. History says artificial intelligence (AI) stocks may do it next.

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Shares of Nvidia have performed poorly since the last stock split.

Nvidia (NVDA 1.75%) A 1-for-10 stock split was completed after the market closed on Friday, June 7th. Like most forward stock splits, this one drove share prices up significantly. The stock is up 225% over the past year and 850% since November 2022, when ChatGPT's launch sparked an artificial intelligence (AI) gold rush.

Nvidia is well-positioned to benefit as more businesses invest in AI. In fact, it's arguably the best pure-play AI stock. However, stock splits have historically been bad news for Nvidia shareholders. The company's value has declined by an average of 23% over the 12-month period following the last split.

Here's what investors should know.

Historically, stock splits have been bad news for Nvidia shareholders.

Except for the most recent, Nvidia has completed five stock splits as a public company, and shares have fallen steadily since then. The chart below shows when each stock split, and shows how the stock performed over the next six months, 12 months, and 24 months.

Date of stock split

6 months return.

12 months return.

24 months return.

June 2000

(50%)

28%

(52%)

September 2001

44%

(72%)

(49%)

April 2006

63%

1%

(6%)

September 2007

(45%)

(70%)

(53%)

July 2021

30%

(4%)

145%

Average

8%

(23%)

(3%)

Data source: YCharts.

As shown above, after the last five stock splits, Nvidia returned an average of 8% over the next six months. But shares fell an average of 23% during the 12-month period after the split, and the stock was still down an average of 3% after 24 months. In short, history suggests that Nvidia could face a steep decline in the near future.

Of course, past performance is never a guarantee of future results, and that adage is especially true here. Four of the last five stock splits have occurred near extreme bear markets. Especially, S&P 500 It fell 49% between March 2000 and October 2002 due to the dot-com bubble, and 57% between October 2007 and March 2009 due to the global financial crisis.

Despite that market crash, there is still a silver lining for patient investors. Shares of Nvidia eventually rebounded after all five stock splits and generated extraordinary long-term returns. The chart below shows the magnitude of these returns till June 12, 2024.

The chart shows Nvidia's annualized returns between 2000 and 2024, and the total post-dividend returns for each stock through June 12, 2024.

Going forward, whether Nvidia is a good or bad investment depends on two things: (1) how fast the semiconductor company can grow earnings per share, and (2) how much investors are willing to pay for those earnings. Are ready.

Nvidia has a sustainable competitive advantage.

Nvidia's graphics processing units (GPUs) have a near monopoly in accelerated computing, a discipline that uses specialized hardware and software to accelerate complex data center workloads such as artificial intelligence (AI) and data analytics. .

Nvidia products consistently set performance records in AI training and MLPerf benchmarks, standardized tests that provide an unbiased evaluation of AI systems. Additionally, the company holds over 90% market share in data center GPUs and over 80% market share in AI chips.

Nvidia Bear brushes aside these strengths and cites growing competition as cause for alarm. In particular, they point to semiconductor companies such as AMD And cloud providers like Amazon, MicrosoftAnd the alphabet, all of which are making chips to replace Nvidia GPUs. But this bearish argument ignores the strong economic moot in Nvidia's full-stack strategy.

CEO Jensen Huang recently told analysts: “We literally build the entire data center.” This means that Nvidia is not just a chipmaker, but a full-stack computing company. Nvidia supplements its GPUs with central processing units (CPUs) and networking hardware designed for artificial intelligence. The company also offers subscription software and cloud services that support AI workflows in a variety of end markets, from manufacturing and logistics to customer service and healthcare.

At the heart of Nvidia's full-stack computing platform is CUDA, a parallel programming language that allows GPUs (originally designed for graphics processing) to act as data center accelerators. The CUDA ecosystem consists of hundreds of frameworks and software libraries that streamline the development of complex applications. This gives Nvidia a huge advantage, as no other chipmaker has a comparable supporting software ecosystem.

To quote morning star Analyst Brian Colello said, “CUDA is proprietary to Nvidia and runs only on its GPUs, and we believe that the integration of this hardware plus software has created high customer switching costs in AI, making Nvidia's has contributed to the wide chasm.”

Nvidia stock looks a bit expensive at its current price.

Going forward, Wall Street expects Nvidia to grow earnings per share by 31.7% annually over the next three to five years. If this number is divided by its current price to earnings multiple of 75.8, the share price/earnings growth ratio (PEG) is 2.4. This multiple is a discount to the three-year average of 3.2, but it is still relatively expensive on an absolute basis.

That said, the consensus earnings forecast leaves room for upside. According to Grandview Research, spending on AI hardware, software and services is predicted to grow by 36.6% annually by 2030. Nvidia can certainly match that speed, and maybe even exceed it. To that end, its current valuation may appear quite reasonable or even cheaper.

Ultimately, investors have to make some tough decisions here, but I think Joseph Moore Morgan Stanley is the right idea. “[W]And the background seems to warrant exposure to AI even with extreme enthusiasm — and Nvidia is the most obvious way to get that exposure,” he wrote in a recent note to clients.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Trevor Genuine has positions at Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a Disclosure Policy.

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