Down 2% from June, history says AI stock will continue to do so

For many investors, Nvidia (NASDAQ: NVDA) emerged as the quintessential artificial intelligence (AI) stock. That’s because the company’s graphics processing units (GPUs) are the industry standard in accelerating complex data center tasks like training machine learning models and running AI applications.

Shares of Nvidia have surged 780% since AI generative app ChatGPT went viral in late 2022. That event sparked a big wave of AI infrastructure spending that is still building momentum, and Nvidia has been one of the biggest beneficiaries. In turn, the stock has become a staple of AI trading.

Nvidia restored its share price to the upside in June by conducting a 10-for-1 stock split. Since then, the stock is down about 2%, but history says Nvidia stock may have more to fall for.

Stock-split stocks like Nvidia typically outperform the S&P 500

Generally, companies conduct forward stock splits after substantial stock price appreciation, which suggests compelling growth prospects and a competitive advantage. Companies that possess these qualities tend to produce above-average shareholder returns.

indeed Bank of America reviewed data from 1980 and found a correlation. Companies that split their stock returned an average of 25.4% in the 12 months after the split was announced. By comparison, the S&P 500 it returned an average of 11.9% over the same period.

Here’s what that might mean: Nvidia announced its latest stock split after the market closed on May 22, 2024. The stock traded at a split-adjusted $95. History says its stock price will rise 25.4% to $119 by May 2025. But the stock is already trading at $119 per share, leaving zero upside (or downside) over the next eight months.

Nvidia has underperformed following previous stock splits

We can also make predictions about Nvidia’s future performance by reviewing company-specific data. For example, the chipmaker completed five stock splits before its most recent one. The chart below shows how the stock has performed over the 12 months and 24 months since the five splits.

Data source: YCharts.

As shown above, Nvidia has typically underperformed following stock splits. Its share price fell an average of 23% in the first 12 months and fell another 3% on average after 24 months.

The story continues

Here’s what that could mean: Nvidia completed its 10-for-1 split after the market closed on June 7. History says its stock price will fall 23% to $93 by June 2025. The stock is currently trading at $119 per share, so the implied downside is 22% over the next nine months.

That said, past performance is never a guarantee of future results. Moreover, most of the stock splits listed in the chart occurred within 12 months of a recession, so Nvidia had little chance of posting positive returns. Going forward, whether Nvidia is a good investment depends on its financial performance and what investors are willing to pay to own shares of the company.

Nvidia is the market leader in artificial intelligence chips

Nvidia dominates the market for data center GPUs, chips used to accelerate workloads such as AI applications. The company accounted for 98% of data center GPU shipments in 2023, virtually unchanged from the previous year, and those GPUs account for more than 80% of AI chips.

There are two reasons for this dominance. First, Nvidia designs the most powerful GPUs money can buy, and rapid product development keeps their GPUs at the cutting edge of performance. Second, Nvidia complements its chips with a robust ecosystem of software libraries and development tools called CUDA. The CUDA platform simplifies building GPU-accelerated applications.

According to Grand View Research, GPU sales are expected to grow 27% annually through 2030, driven by the proliferation of machine learning and artificial intelligence. Nvidia’s sales should grow at a similar rate, plus or minus a few percentage points. However, earnings may rise slightly faster due to share buybacks and potential margin expansion driven by pricing power.

Wall Street forecasts adjusted earnings to grow 35% annually through fiscal 2027 (ending January 2027). That consensus makes the current valuation of 54 times earnings look tolerable. Investors should consider buying a small position in Nvidia stock today, provided they are comfortable with volatility and willing to hold the stock for at least three to five years.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Bank of America and Nvidia. The Motley Fool has a disclosure policy.

Nvidia Stock Split Update: Down 2% Since June, History Says AI Stock Will Do It Next was originally published by The Motley Fool