Shares of Nvidia (NASDAQ: NVDA) have surged following a strong first-quarter earnings report on May 22 and the announcement of a 10-for-1 stock split. In less than two weeks, the stock has risen by roughly 20%, with momentum continuing as the stock split is set to take effect after hours on June 7. Shares have climbed nearly 10% since the initial bounce on these announcements.
Investors are reacting positively to Nvidia’s upcoming split for several reasons. While stock splits do not alter the fundamentals of a stock or the business, investors view them as a positive signal from management that the share price is expected to continue rising. Splits also reset the share price, indicating that it has reached a milestone and is poised for further growth.
Moreover, stock splits make individual shares more affordable for retail investors, potentially boosting demand. Studies show that stock splits are associated with outperformance over the following year, driven by both business momentum leading to the split and investor enthusiasm resulting from the split.
In the case of Nvidia’s upcoming split, investors are particularly optimistic for an additional reason. Some believe that Nvidia could replace Intel (NASDAQ: INTC) in the Dow Jones Industrial Average, solidifying its status as a blue chip technology stock.
The Dow Jones is a price-weighted index, meaning the impact of each stock on the index is based on its share price. If Nvidia were to join the Dow at its pre-split share price, it would have a significant weight and distort the index. However, post-split, Nvidia’s share price is expected to align with the median price of current Dow components.
On the other hand, there are concerns about Intel’s potential removal from the Dow due to its lackluster performance in the semiconductor industry. Intel’s stock has underperformed for years, while Nvidia has shown robust growth. If Intel were to be ousted from the Dow, Nvidia could be a logical replacement, given its market cap and industry representation.
While Nvidia’s inclusion in the Dow may not have a substantial impact on its stock price, it would be a symbolic achievement for the company. It would affirm Nvidia’s position as a top-tier tech stock and demonstrate sustained success to investors. Conversely, Intel’s removal would underscore its struggles and the need for more dynamic industry representatives in the index.
In conclusion, Nvidia’s upcoming stock split and potential inclusion in the Dow Jones Industrial Average reflect the company’s strong performance and market position. While the exact timing of any changes remains uncertain, Nvidia’s recent growth and investor confidence suggest a positive outlook for the company’s future.