Retail Investors Have Fallen for This Trick Before

It’s unbelievable. Well, almost

Back in 2020, chipmaker Nvidia (NVDA) was already a huge company. It was churning out some of the fastest graphics processing units (“GPUs”) in the market. And it was valued at roughly $150 billion to start that year.

But not many folks realized how far this company was going to go.

The COVID-19 pandemic and resulting work-from-home trend supercharged demand for personal computers and laptops. All these devices needed GPUs to function.

Meanwhile, the boom in bitcoin unleashed a huge wave of new demand for GPUs in cryptocurrency-mining equipment.

Then, artificial intelligence (“AI”) started hitting mainstream in business. Nearly every company dealing with lots of data was either using AI or making plans to integrate it in operations.

Nvidia was in the right place at the right time… more than once. And it has paid off handsomely for shareholders.

Today, the company is worth a staggering $2.7 trillion.

It has become the third-largest company in the U.S. stock market. And its shares are up a whopping 1,742% since the beginning of 2020.

Time and time again, Nvidia has proven many analysts and famed investors wrong. Over the years, folks have said the stock was expensive, overvalued, and overhyped.

Even today, at a forward price-to-earnings (P/E) ratio of more than 40 times, the skepticism is understandable.

But money keeps pouring into Nvidia’s stock. And now, the company is using one of the oldest tricks in the book to make sure retail investors keep buying…

On May 22, Nvidia announced first-quarter results that blew away expectations. Revenues came in $1.45 billion higher than estimates. Meanwhile, adjusted earnings per share were about 10% better than expectations.

In the press release, Nvidia CEO Jensen Huang got investors even more excited for the future. As he declared, “the next industrial revolution has begun.”

He also announced that Nvidia would do a 10-for-1 stock split effective June 7.

For retail investors, that’s a big deal…

Prior to the earnings release, Nvidia was trading for about $950 for a single share.

That means for retail investors with smaller brokerage accounts, owning part of Nvidia was getting out of reach.

But by splitting its stock 10-to-1, Nvidia would increase its outstanding shares by 10-fold. And in the process, it would also adjust its stock price down by 90%.

Far more average folks can afford to own a $95-per-share stock than a $950 one.

Of course, this doesn’t actually change the true value of the shares. But it has a powerful psychological effect.

And when it comes to huge companies, Nvidia isn’t the only one to do this trick. For example…

  • In July 2020, Apple (AAPL) announced plans for a 4-for-1 split when its shares went above $380.
  • In February 2022, Alphabet (GOOGL) announced a 20-for-1 split not too long after its shares nearly reached $3,000.
  • Amazon (AMZN) also underwent a 20-for-1 split, which went into effect in June 2022. It made the announcement in March of that year, when its shares were trading at nearly $2,800.
  • And in August 2022, when its shares were trading for just less than $900, Tesla (TSLA) announced a 3-for-1 split.

The average gain in the share prices for these four major companies over 30 days leading up to their respective stock splits was nearly 11%.

But the average change for them over a 30-day period after the stock split was another story. It was a loss of nearly 4%.

With the Nvidia stock split to come into effect soon, the shares are already up 16% since the announcement.

That’s more than the average move of those four other monster companies I mentioned.

What this means is that the typical rally that we usually see ahead of major stock splits could have already largely played out for Nvidia.

Now, I’m certainly not saying to dump NVDA shares…

But I wouldn’t be surprised to see some eventual profit taking after the stock split goes into effect next month. The “smart money” on Wall Street could take advantage of the huge run higher.

And again, don’t be fooled by the stock-split trick. The true share value doesn’t change – just the perception with the average investor.

Good investing,

Vic Lederman

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