Demystifying Stock Splits: An Investor‘s Guide to Nvidia‘s 4-for-1 Stock Split

Imagine sharing a pizza with three other friends. Now imagine that same pizza is cut into 32 slices instead of 8. You each get more pieces, but are still entitled to the same share of the total pizza.

That‘s essentially what stock splits do – "slice up the pizza" to create more shares outstanding without changing company value.

In this comprehensive guide, we‘ll decode key questions around stock splits using graphics leader Nvidia‘s high-profile 4-for-1 split in 2021 as our case study:

• Why do splits happen?
• What impacts do they actually have?
• What does Nvidia‘s split mean for future growth?

First, let‘s get to know more about Nvidia the company and its financial trajectory.

Nvidia: Pioneering Visual Computing Chips

You may know Nvidia as the brand behind leading graphics cards that enable intense video gaming experiences. But gaming is just one facet of Nvidia‘s technology powering growth across industries.

Key Facts About Nvidia

• Founded in 1993, IPO in 1999
• Headquarters in Santa Clara, CA
• CEO/Founder: Jensen Huang

Business Model

Nvidia specializes in making Graphics Processing Unit (GPU) silicon chips that excel at visual computing tasks like rendering video game environments or processing AI image recognition workloads.

The company generates revenue by selling GPUs across various end markets:

Nvidia maintains leadership supplying the GPU chips enabling immersive gaming experiences and increasingly powers next-gen workloads in AI, cloud computing, autonomous vehicles, and the emerging "metaverse".

Financial Performance

Over the past 5 years, Nvidia has posted staggering growth:

• 2017-21 annual revenue CAGR of 39%
• Expanding gross margins from 59% to 65%
• 2021 marked an astounding 61% YoY revenue growth reaching $27 billion

This top and bottom line execution has propelled Nvidia‘s stock to meteoric returns discussed shortly. But first, let‘s understand exactly what stock splits are.

Defining Stock Splits

A stock split is when a company decides to divide existing shares into multiple new shares to adjust the stock price lower.

For example, let‘s say a company has 10 million shares trading at $100 per share. Enacting a 2-for-1 split would double outstanding shares to 20 million and cut the stock price to $50 accordingly to keep market capitalization equal.

So after a split, existing shareholders retain the same proportional ownership and value, just represented across more shares at a reduced per share price.

Splits don‘t directly change fundamentals. However, as we‘ll explore later, they can have psychological impacts on investors. Companies will also pursue splits to restore per share prices to more affordable and liquid ranges if prices climbed very high.

Now let‘s analyze Nvidia‘s specific split.

Nvidia‘s Stock Split: A 4-for-1 in 2021

On May 21, 2021, Nvidia announced a 4-for-1 stock split after shares had soared to over $550. Here is an overview of key timeline events:

• On split approval in early June, Nvidia closed around $575 per share
• Leading up to the July distribution date, anticipation kept pushing shares higher beyond $600
• From there, the split adjustment meant opening on July 20th at roughly 1/4th previous per share prices
• So the new split-adjusted share price was $169 opening July 20, compared to $190 pre-split close on July 19

This brought Nvidia‘s per share price back down from recent all-time highs to make it seem more affordable to retail investors after huge run-ups.

But what was behind management deciding to split after 14 years?

Why Did Nvidia Split Its Stock?

According to CEO Jensen Huang, the core goal of Nvidia‘s split was making shares more accessible. In the press release, Huang explained:

"Our stock split will make stock ownership more accessible to our employees and investors…it allows more investors to share our success."

Indeed, Nvidia had just closed out a momentous 2020 fiscal year in early 2021 where several catalysts drove shares higher:

• 61% annual revenue growth to a record $16.7 billion
• Strong sales growth across gaming, data center, and auto segments
• Work-from-home tailwinds significantly benefiting cloud infrastructure (powered by Nvidia chips)

This dovetailed into a blazing run in the stock itself. Between March 2020 market lows and the 2021 split announcement, Nvidia stock rocketed over 1,100% higher:

With shares entering well into the $500+ range, management likely feared pricing out smaller retail traders and employees paid in equity like options.

Making shares seem more affordable via the split would allow more investors to purchase round lots. It also keeps shares accessible as a compensation lever to attract talent.

Post-Split: Temp Boost Fades Amid 2022 Tech Rout

In the immediate months following Nvidia‘s July 2021 split, shares did see a renewed wave of investor interest play out in a couple ways:

• On split-adjusted basis, stock jumped 4.3% the next day
• Retail investor activity spiked 30% for the next month per JPMorgan data

This demonstrates the psychological impact of lower nominal share prices drawing attention and new buyers.

The bullish momentum carried NVDA to fresh all-time highs around $346 in November 2021. However, as macro conditions shifted, gravity took hold.

High inflation led the Federal Reserve towards aggressive interest rate hikes to slow the economy. Investors dumped riskier assets like technology stocks as a result. On top of that hitting sentiment:

• Fears of recession risk taking hold
• Loss of Nvidia‘s Arm acquisition amid regulatory scrutiny
• Ongoing supply chain instability

Nvidia shares entered a steep correction phase from November peaks, sliding as much as 67% to trough around $115 in July 2022. Volatility has ensued since in lockstep with broader markets.

While the split glow faded with bearish swings in investor sentiment, the expanded ownership still benefits Nvidia long term.

Psychology Explains Post-Split Share Price Spikes

If splits don‘t immediately change anything fundamental, why do post-split share prices often rise in the short term?

Investor psychology explains this phenomenon. By reducing the perceived cost of entry post-split, more retail traders can participate. And existing holders may interpret splits as a signal of strong growth ahead.

Two of the main behavioral biases coming into play:

1. Improved Affordability – Lower nominal dollar per share prices fit smaller wallet sizes. This appeals psychologically, driving previously priced-out traders to buy.

2. Increased Attractiveness – Investors are more attracted to stocks seeming "cheaper" regardless of the company valuation staying constant. They also don‘t want to miss suddenly hot momentum.

Additionally, companies rarely split struggling stocks. The split implicitly signals confidence in growth prospects – assuring current owners and further stoking interest.

These dynamics combine to boost demand in the months following splits. Stock prices climb correspondingly until gravity rebalances sentiment back towards business fundamentals.

Future Split? Projecting Nvidia‘s Growth Trajectory

Given the huge operating leverage in Nvidia‘s business model, shares could certainly ascend much higher in future years if execution remains best-in-class.

Analysts see revenue potentially reaching $60 billion by 2027. And if global GPU demand continues robust growth – especially data center and AI use cases – numbers could prove conservative.

Let‘s model hypothetical scenarios and implications on share pricing:

• Bull Case: 20% annual growth -> $120 billion revenue by 2030
  • At trailing 5 P/S ratio: potential $600 billion market cap
  • Stock price: $1000+ -> split candidate
• Base Case: 15% annual growth -> $60 billion revenue
  • $300 billion valuation = stock price $500
• Conservative Case: 10% annual growth -> $40 billion revenue
  • $200 billion valuation = less split likelihood

Of course as we saw in 2022, macro environment shifts can quickly override individual equity trajectories. And competitive dynamics in the global semiconductor space carry risks as well.

But using today‘s lens, Nvidia retaining elite positioning in AI, gaming, cloud graphics etc. points towards strong continued expansion if secular themes play out at robust rates.

Key Takeaways on Stock Splits

Wrapping up this deep dive into Nvidia‘s recent split, let‘s summarize key lessons for investors looking to maximize returns:

• Companies split stocks trading at very high nominal prices to restore accessibility and liquidity
• Psychology makes lower perceived share costs attractive, driving temporary price spikes
• Ultimately long-run direction depends on executing the underlying business
• For fast-growing stocks like Nvidia, follow future splits as possible buy indicators

And importantly, while splits generate short-term hype, don‘t lose sight of overarching strategy and risk management.

I hope this clearly explained stock splits and framed how to incorporate events like Nvidia‘s into thoughtful investment decision-making as an individual. Please reach out with any other questions!