Dow component Apple Inc. (AAPL) and Tesla, Inc. (TSLA) have stunned long-time market watchers in the past two weeks, declaring the first splits of popular growth stocks in years, with the minor exception of mergers that required splits to equalize share value. It has paid off so far, with both stocks attracting buying interest from the youthful Robinhood trading crowd. Other big tech names are taking note, raising the odds for dozens of splits in the next one or two years.
- NVIDIA could attract fresh investment with a four-for-one or five-for-one stock split.
- The stock has rallied more than 2,400% in the past five years and 140 points in the past three months.
- There are no signs that the current rally is coming to an end, despite extremely overbought technical readings.
NVIDIA Corporation (NVDA) looks like an excellent candidate in this regard, nearly quadrupling in price since the December 2018 low at $124.46. The five-year performance numbers are even more impressive, with a staggering 2,400% return off the low in the upper teens. The stock is also trading at an all-time high following a major breakout, highlighting intense buying interest that is likely to increase with a four-for-one or five-for-one split.
Wall Street is "all in" on NVIDIA, with a "Strong Buy" rating based upon 26 "Buy," 3 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $260 to a Street-high $520, while the stock opened Thursday's session about $42 above the median $419 target. The company now holds a lofty price-to-earnings ratio (P/E) of 85.55, indicating that it may need to book aggressive quarterly growth to generate further upgrades.
A stock split is when a company divides the existing shares of its stock into multiple new shares to boost the stock's liquidity. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.
NVIDA Long-Term Chart (1999 – 2020)
NVIDIA came public at a split-adjusted $1.83 in January 1999 and entered a strong uptrend a few months later, lifting into the mid-$20s in 2002. A 2006 breakout posted a high near $40 in October 2007, marking the highest high for the next nine years, ahead of a steep decline that ended at a four-year low in the first quarter of 2009. The stock bounced into the new decade but made limited progress, stalling in the mid-$20s in 2011.
Price action awoke from the dead in 2015, underpinned by the Bitcoin mining craze. The uptrend escalated into the 2018 high at $293 and flamed out, yielding a 152-point decline into year end. The stock completed a 100% retracement into that peak in February 2020 and rolled over with world markets, dropping to a five-month low. It recovered into May and broke out once again, adding more than 140 points into this morning's opening print.
Bitcoin is a digital currency created in January 2009 following the housing market crash. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
NVIDIA Short-Term Chart (2018 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator broke out above the 2011 high in 2016 in a historic accumulation wave that topped out in the first quarter of 2018. OBV broke out again in October 2019 and June 2020, matching highly bullish price action. Buying power is showing no signs of letting up in this optimistic summer tape, adding a stiff tailwind that forecasts even higher prices.
However, the uptrend has now reached the 2.00 Fibonacci extension of the prior range, marking a high-odds turning point. The stock is extremely overbought after the vertical breakout, adding to caution, but there are no technical signs that the rally is losing steam. As a result, a magnetic move into the psychological $500 level may be in the cards, offering a good place to take profits. Even so, a well-timed split announcement could lift the uptrend through that level, in a final burst of bullish energy.
The Bottom Line
NVIDIA would make an ideal candidate for a four-for-one or five-for-one stock split that adds a new batch of shareholders before a historic uptrend eventually tops out.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.