Last week, NVIDIA, the leading player in artificial intelligence (AI), reported impressive earnings, resulting in its stock price surging past the $1000 markThis financial success came alongside the announcement of a stock split, scheduled for June 7, which could have significant implications for its stock priceMost notably, this development may signal a broader trend among high-priced tech stocks, as several of the "seven giants" in the technology sector are anticipated to face similar stock splits in the near future.

The implications of stock splits have long been a topic of discussion among investorsNVIDIA's recent announcement detailed a "1-for-10" stock split, which will take effect after the market closes on June 7, marking it as the eighth U.Spublicly traded company to declare a forward stock split in 2023, following industry giants like Walmart and Chipotle.

Understanding the mechanics of stock splits is crucial

A forward stock split increases the number of shares held by shareholders while reducing the nominal price per shareFor example, a "1-for-2" split would double the number of shares a shareholder possesses while halving the share priceConversely, a reverse split reduces the number of shares an investor holdsMany splits are forward splits, which tend to attract particular attention from the market.

According to Chen Dalong, a former trader from a hedge fund who now manages his own quantitative fund, "A stock split does not inherently lead to higher returns and therefore does not increase or decrease the value of a companyThe market capitalization remains constantHowever, splits can facilitate access for specific investors, enabling them to purchase shares more easilyAdditionally, it often enhances liquidity and can narrow the bid-ask spread, enticing more funds to invest." This perspective aligns with findings from a recent Bank of America report, which states that while stock splits do not impact a company’s fundamentals or market value, history shows that particularly forward stock splits are often perceived as bullish indicators by the market.

Past data reveals compelling trends: since 1980, companies within the S&P 500 that have announced stock splits have significantly outperformed the index itself in the subsequent three, six, and twelve months

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For instance, these companies saw an average price increase of 25.4% over twelve months, compared to an 11.9% rise in the S&P 500 during the same periodA prime example is Apple, which saw its stock soar over 30% within a year following its own 1-for-4 split in 2020. NVIDIA, in its own 1-for-4 split in 2021, experienced its share price leap from roughly $600 to a peak of $835 before the split—which ultimately resulted in a subsequent 450% price increase.

Furthermore, Bank of America noted the liquidity boost from stock splitsThe firm highlighted that a driving factor behind Walmart's recent split was the concern that a high share price was putting the stock out of reach for employees and retail investors alikeThus, while splits significantly impact share prices themselves, they also create ripple effects that extend to options contracts tied to the shares.

In NVIDIA's case, the 1-for-10 split will increase the number of shares by tenfold while decreasing the share price to one-tenth

This means that holders of options contracts will see their contract quantities increase likewise, with each obligation being adjusted to reflect the split mechanicsHence, a single call option with an exercise price of $1000 will morph into ten options at $100 each, typically resulting in lower liquidity for these adjusted contractsSuch a shift necessitates more nuanced trading strategies from investors, amplifying their ability to influence stock prices.

Importantly, irrespective of the immediate effects of the stock split itself, NVIDIA remains one of Wall Street’s darlingsOver the past four years, its stock has surged an astounding 1080%. This means that an investment of $10,000 in May 2020 would now be valued at approximately $118,000. In contrast, the S&P 500 has delivered a return of 91%, turning a similar $10,000 investment into nearly $20,000. Despite such extraordinary gains, 90% of analysts on Wall Street still advocate buying NVIDIA stocks, while the remaining 10% recommend holding, with no one suggesting a sell

Analysts have set a median price target of $1200 per share for NVIDIA.

According to Chen Dalong, "The demand for NVIDIA's GPUs is skyrocketing as it meets the surging needs of data centers powered by AI development." He further elaborated that NVIDIA's valuation may not be as excessive as some investors fearAlthough its current price-to-earnings (P/E) ratio is indeed around 76, indicating a premium valuation, he asserts that this is valid for a company undergoing significant transformation and continuous robust growthA more suitable measure to evaluate its worth is the forward P/E ratio, which stands at about 36x—entirely reasonable compared to Microsoft’s forward ratio of 35x, especially given that Microsoft’s growth pace is notably slower.

The inquiry into further technology stock splits is energized by the possibility that NVIDIA's split could herald a new trend

Historically, the major tech conglomerates—the "seven giants" of the industry—have had their share splitsWith Google, Apple, Amazon, and Tesla all splitting shares post-2020, analysts from Bank of America suggest that NVIDIA's split might provoke similar actions from other high-performing companies with elevated stock prices.

Research indicated that there are at least 36 companies in the S&P 500 with share prices over $500, totaling an impressive market capitalization of $7.4 trillionWithin the "seven giants," both Microsoft and Meta approach this data threshold, and Broadcom, Super Micro Computer, and Netflix are also potential candidates for stock splits.

Dalong emphasizes that Super Micro Computer and Broadcom stand out among those likely to follow NVIDIA's leadHe notes that Super Micro's investment returns have even eclipsed those of NVIDIA over the past three years

Many investors credit Super Micro's success to the rise of NVIDIA's AI chips; however, Super Micro's performance is driven by an edge cultivated by CEO Charles Liang over the last three decadesThey have a unique "building block" approach to constructing servers, allowing customers to customize their systems flexibly while saving costs by only updating individual componentsDespite the stock's current P/E ratio reaching approximately 50x, its recent quarter achieved a remarkable 200% growth that justifies this valuation.

Super Micro's stock, which has surged approximately 25 times in under three years, positions it near a split as it approaches $900 per shareIn contrast, Dalong considers Broadcom to have immense potential to capitalize on the AI wave, bolstered by its advanced networking and routing chips, complemented by a robust acquisition strategy under CEO Hock Tan, transforming it into a diversified technology powerhouse.

With both companies poised for a potential stock split, the broader tech sector may soon witness further movements aimed at harnessing the growth potential triggered by recent AI advancements, positioning stock splits as not merely mechanical financial maneuvers but as strategic decisions shaping the landscape of the industry.