Everyone who said that NvidiaIt is (NASDAQ:NVDA) the stock price would just plunge if their prediction came true. But not as they hoped.
Nvidia led a 10 for 1 stock split after the market close on Friday, June 7, 2024. Its stock price at market open on Monday was approximately 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 is a simple answer to this question: it is absolutely not too late to buy Nvidia stock. Why is this answer so simple? The stock split does not change anything in the company’s business.
A stock split does two things. First, it increases the number of outstanding shares. In the case of Nvidia, the number of shares increased tenfold. Second, this increase lowers the stock price by a proportional amount.
Did you want to buy Nvidia before the stock split due to growing demand for its graphics processing units (GPUs)? Were you interested in the stock because of the prospects of its upcoming Blackwell platform? These reasons to buy remain intact. The only difference between now and before the stock split is that Nvidia’s stock price is much cheaper.
To be sure, it’s possible that Nvidia shares could fall further after the sharp rise that preceded the stock split. On the other hand, the stock’s momentum could pick up as retail investors, previously kept away due to the stock’s sky-high stock price, start buying Nvidia.
A more difficult answer
Now let’s move on to a more difficult answer to the question. The optimal time to buy Nvidia may now have passed for reasons unrelated to the stock split.
Demand for Nvidia chips remains exceptionally strong. The company’s sales and profits continue to soar. However, some would argue that all of this is already priced into Nvidia’s stock price.
The stock trades at nearly 71 times trailing 12-month earnings and nearly 47 times forward earnings. These valuation measures 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 particularly attractive.
Is there anything that could reasonably derail Nvidia’s growth? The answer to this question is a resounding “yes”. Other chipmakers are working 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 reliance on Nvidia.
The Pelosi strategy
If you want to profit from Nvidia but have concerns about its growth, there is another approach. We could call it “the Pelosi strategy” in homage to Paul, the husband of former House Speaker Nancy Pelosi.
Mr. Pelosi invested in Nvidia by purchasing hot call options with expiration dates of at least a year. Call options give him the right (but not the obligation) to buy shares of…
