Stock splits seem to be coming back into vogue.
After Walmart (WMT -0.25%) and Chipotle Mexican Grill (CMG 0.39%), two of the higher-profile consumer goods stocks on the market, both announced stock splits earlier this year, Nvidia (NVDA -0.36%) became the latest closely watched stock to announce a split, telling investors during its earnings report on May 22 that would execute a 10-for-1 split on June 10.
With that move, Nvidia becomes the latest "Magnificent Seven" stock to reward investors with a stock split. In fact, out of the group of seven tech stocks, only Meta Platforms and Microsoft haven't done a stock split since the pandemic began.
Stock splits attract a lot of attention from retail investors, but they don't actually change the fundamentals of the stock or the business. A stock split effectively splits the shareholder "pie" into more pieces. For example, if you had 10 shares worth $10 each before a 2-for-1 split, you'd have 20 shares worth $5 each afterwards. However, the total value of stock you own would remain the same at $100.
Despite the mathematical reality of a stock split, there's some evidence that stocks do better after a stock split. According to research from Bank of America, on average, stocks that split have historically returned 25% in the following year, compared to just a 12% return for the S&P 500.
Ahead of Nvidia's stock split, Walmart and Chipotle appear to offer the latest example of this pattern. Let's take a closer look.
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Walmart and Chipotle reward investors
Walmart announced its first stock split in a generation earlier this year. The move came after several years of a strategic overhaul under CEO Doug McMillon, which modernized the company by building up the omnichannel and e-commerce businesses, embracing new growth opportunities like advertising, remaking its international portfolio (including acquiring India's Flipkart), and leveraging its strength in grocery.
As a result of those moves, Walmart handily outperformed the S&P 500 since the stock bottomed out in late 2015, when the market balked at McMillon's plan to ramp up capital expenditures to invest in stores. The stock has more than tripled since, leading Walmart to offer a 3-for-1 stock split, which it announced in late January.
The company said the move was designed to encourage its employees to participate in its stock purchase plan, giving them the opportunity to benefit from the company's rising stock price.
Similarly, Chipotle announced its first stock split ever earlier this year, coming after years of superior growth under CEO Brian Niccol. Niccol helped the burrito roller turn the page past the E. coli outbreak that pulled down the stock earlier, and the company has reported strong growth by embracing drive-thru with the Chipotlane concept as well as the digital and delivery channels.
When Chipotle announced a 50-for-1 stock split in March, it offered a similar explanation to Walmart, saying it would make the stock more accessible to employees and a broader range of investors.
Both Walmart and Chipotle have jumped since their stock split announcements.
How Nvidia is like Walmart and Chipotle
Walmart and Chipotle both rewarded investors with stock splits, not just to make the shares more accessible to employees, but also because they're at the top of their games, executing near perfectly. Both companies delivered flawless first-quarter earnings reports in recent weeks and soared on the results, showing that the stock splits were also a sign of confidence from management. They're choosing to split their shares because they believe their stock prices will continue to climb.
Nvidia is in the same boat. The AI chip superstar has been posting blockbuster results since shortly after ChatGPT was launched, with revenue more tripling over the past year and profits growing even faster.
CEO Jensen Huang talked up building "AI factories" on the recent earnings call, seeing his company as the end-to-end provider of all the hardware needed to run complex AI models like ChatGPT in the generative AI era, which he sees as the next industrial revolution. Nvidia is doing this when rivals like AMD and Intel are only just starting to launch their own data center GPUs designed for generative AI, showing that Nvidia has a huge head start.
In other words, Nvidia is clearly at the top of its game, as the recent earnings report reminded us as well.
In that sense, buying the stock because of the stock split is less about the mechanics of the split and its impact on the stock than it is about management's view of the company. What the stock split seems to say is that Nvidia's management, like Chipotle's and Walmart's, is confident that the stock price will continue to go up, and that the company is well positioned in the competitive landscape and will continue to execute and grow the business.
That, as much as any other factor, looks like a good reason to buy Nvidia stock, just as it's been a good reason to buy Walmart or Chipotle stock. Don't be surprised to see Nvidia stock continue to march higher after the split.
