NVIDIA (NASDAQ: NVDA) It has probably been the most watched stock on the planet over the past few months. That’s because the company dominates the artificial intelligence (AI) chip market and its growing revenues have caused the stock to soar. In the first half of the year, the stock soared by more than 150%, and that’s after gaining more than 1,300% in the previous five years.
In fact, this momentum pushed Nvidia shares above the $1,000 threshold, a level that can be a psychological barrier for some investors and, in other cases, makes it difficult for small investors to buy without relying on fractional shares. That’s why Nvidia recently launched a stock split to reduce the price of each individual share. Investors welcomed the news and the stock rose by almost 30% from the announcement of the split to the transaction itself.
Now, however, the big question is whether Nvidia’s momentum will continue after the split and whether this leading chip designer will take off in the second half. Let’s look to history for some answers.
Observing historical patterns
First of all, it is important to note that just because a certain pattern has occurred in the past does not guarantee that the same pattern will continue in the future. Therefore, any conclusions we draw can guide us, but they are not set in stone. The market or a particular stock may surprise us.
That said, the patterns are replicated frequently enough to be worth considering. They can offer us insight into what generally happens after a certain event, making us aware of the likely possibilities.
Let’s move on to the idea of a stock split and what history shows. A stock split, by issuing new shares to current holders, reduces the price of each individual share, but without changing the market value of the company or the valuation of the stock. Therefore, the transaction has not changed anything fundamental about the particular company or stock.
But the split does one important thing: it opens up the investment opportunity to a broader range of investors. This is good for you and me because it makes it easier for us to invest in a company like Nvidia, and it is good for the company because it gives it a whole new audience of potential investors. So it’s a win-win situation. Nvidia’s 10-for-1 stock split dropped the stock price from over $1,000 to about $125.
Stock splits themselves, since they are purely mechanical operations, are not catalysts for stock performance: you wouldn’t buy a stock just because the company has launched a split. But, as you can see in the chart below, history shows that participants in stock splits tend to outperform the S&P 500 in the 12 months following the stock split announcement.
The chart shows that companies that have split their stock have generated an average total return of more than 25% over that 12-month period, compared with less than 12% for the S&P 500 as a whole. Bank of AmericaData from Columbia University Investment Research Committee from 1980 to the present.
Past Nvidia Stock Splits
Now we can dig deeper by looking at Nvidia itself after its last two stock splits, in 2007 and 2021. After both, the stock fell in the following 12 months, but first, the stock advanced in the two to five months after the operation. Nvidia shares rose more than 60% in the five months following the 2021 split and added about 17% in the six-week period following the 2007 split.
So what does all this tell us about what can happen today? It’s important to note that Nvidia’s business has evolved a lot since the last stock splits. Later, it mainly served the video game industry and progressively ventured into other areas, such as AI. Today, the high-growth field of AI is the company’s core business, making the stock much more attractive to investors. Therefore, Nvidia may have stronger momentum today than after previous splits, and that could make a lasting rebound possible.
This could happen if Nvidia continues to report impressive earnings growth and meets product launch targets. And things are looking promising. Nvidia has reported quarter after quarter of record revenue and says demand for its soon-to-be-released Blackwell chip and architecture is outstripping supply. And speaking of Blackwell, this launch could also be a positive catalyst for the stock.
All of this means that Nvidia stock is very likely to soar in the second half, thanks to the company’s leadership in a high-growth market and solid revenue outlook. And the best news is this: Even if history is wrong and Nvidia doesn’t move higher in the coming months, this blue-chip stock still has what it takes to deliver big returns to long-term investors.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Nvidia. The Motley Fool has a disclosure policy.
After Nvidia’s stock split and 150% first-half gain, will it soar in the second half? Here’s what the story says. was originally published by The Motley Fool