Nvidia to implement 10-for-1 stock split: 7 reasons to completely avoid Wall Street’s hottest artificial intelligence (AI) stock

Over the past few years, the hottest trends on Wall Street have been artificial intelligence (AI) and companies doing stock splits. Going forward, these two catalysts will collide to create the hottest mega-cap stocks. NVIDIA (NVDA 1.25%).

A “stock split” is a purely cosmetic event that allows a publicly-traded company to change its share price and the number of shares outstanding in the same proportion. It is cosmetic in the sense that it has no effect on the company’s market capitalization or financial performance.

On May 22, NVIDIA announced that its board of directors had approved a 10-for-1 stock split, meaning shareholders will own 10 times as many shares and the stock price will fall to one-tenth of its current price. When the market opens on Monday, June 10, NVIDIA’s stock will trade at the split-adjusted price.

The reason investors flock to stocks that split stocks, and more specifically, companies that do so like Nvidia, is because these companies have a long track record of innovating and executing better than their competitors.

Nvidia has been consistently beating Wall Street revenue and profit forecasts for over a year, and artificial intelligence is no doubt the reason. The company’s H100 graphic processing units (GPUs) have become the standard choice for companies looking to train large language models or run generative AI solutions. As demand for these high-performance chips overwhelms supply, Nvidia enjoys extraordinary pricing power. As a result, the company’s gross margins for its most recent quarter (ended April 28) rose an astounding 78.4%.

With splitting stocks on a nearly unstoppable trajectory and AI being the hottest topic of the moment, I’m here to provide some necessary reality checks — specifically, seven reasons why you should completely avoid Nvidia, Wall Street’s hottest AI stock and the newest member of the splitting club.

1. AI-GPU pricing power has likely peaked

Let’s start with the obvious: new competitors are entering the AI-GPU space. Intel (International Trade Commission -0.86%) The company plans to launch its Gaudi 3 AI accelerator chip in the third quarter. Advanced Micro Devices (AMD -2.18%) The company has been steadily expanding the rollout of its MI300X GPU, a direct competitor to Nvidia’s H100 GPU.

Here’s the problem: Even if Nvidia’s H100 and successor chips maintain their computational advantage over Intel, AMD, and other future competitors in AI-accelerated data centers, the mere presence of these chips on the market will alleviate the crushing supply shortages that drove Nvidia’s GPU prices into the stratosphere in the first place.

Nvidia’s second-quarter forecast calls for gross margins to decline by 235-335 basis points, which could signal that the company’s pricing power for its AI infrastructure has peaked.

2. Internal competition is intensifying

Regardless of the upcoming stock split, I would argue that the biggest reason to avoid buying NVIDIA stock is the increase in the share price that we are witnessing. internal competition.

While most people are focusing on what Intel and AMD are doing to counter Nvidia’s dominance in high-performance data centers, they’re overlooking the fact that each of Nvidia’s major customers is developing their own AI-GPUs. Microsoft, Meta Platform, Amazonand alphabet These companies account for about 40% of Nvidia’s net sales and all plan to deploy their own AI chips in their data centers.

Whether these homegrown chips are meant to complement or eventually replace Nvidia’s GPUs is irrelevant — the main takeaway here is that we’re likely seeing a peak in ordering activity from some of Wall Street’s most influential companies.

3. U.S. regulators tightened export controls on China

U.S. regulators haven’t done NVIDIA any favors either: In 2022, they restricted the company’s exports of high-performance artificial intelligence chips to China, the world’s second-largest market by gross domestic product (GDP).

In response to these restrictions, Nvidia developed its lower-performance A800 and H800 GPUs specifically for China, and last year U.S. regulators restricted exports of those chips to China as well.

The inability to export to China could cost Nvidia billions of dollars in lost sales each quarter.

Image source: Getty Images.

4. No insider purchases in over three years

In December 2020, Nvidia’s Chief Financial Officer Colette Kress bought 200 shares of the company’s stock. Since this open market purchase, no other insiders have bought a single share of Nvidia stock.

Meanwhile, there have been dozens of insider sales of stock in the past three and a half years. While there are generally harmless reasons for selling stock, such as tax planning, there is pretty much only one reason to buy stock: the conviction that the stock is undervalued. If not a single insider has chosen to buy Nvidia stock in the past 41 months, why should you?

5. History is undefeated

Past performance is no guarantee of future results, but when it comes to the next big trend or innovation, history has been undefeated for the past 30+ years.

Every next-generation investment trend in the past 30 years has experienced a bubble-busting event during the early stages of adoption. Investors consistently overestimate the adoption and usefulness of new trends and technologies, and it is unlikely that artificial intelligence will not follow the same path.

Nvidia is the company most directly benefiting from the AI ​​revolution, which means it’s likely to be hit hardest if the AI ​​bubble bursts and investors’ lofty expectations aren’t met.

S&P 500 Shiller CAPE Ratio data Y Chart.

6. Signs of economic recession/stock market correction are a concern

The sixth reason to hold onto Nvidia stock despite its scheduled stock split happening just days away is that a combination of recession forecasting tools and stock market indicators are warning of potential trouble ahead.

For example, the U.S. M2 money supply has declined significantly for the first time since the Great Depression. Since 1870, M2 has only fallen by more than 2% year-over-year four times, and these declines correlated with periods of recession and high unemployment. While a recession is highly unlikely today, a reduction in the available capital in circulation is an important factor in economic downturns.

on the other hand, S&P 500The company’s Shiller price-to-earnings (P/E) ratio is the highest in history (34.54 as of the May 31 close) going back to 1871. The Shiller P/E is calculated based on inflation-adjusted average earnings over the past 10 years.

In the last five instances in which the Shiller P/E ratio exceeded 30 during a bull market, the S&P 500 and Dow Jones Industrial Average At least 20%. Companies that trade at a premium, like Nvidia, will be the most likely to fall during a correction.

7. Stock splits can’t obscure dot-com bubble valuation comparisons

The seventh and final reason not to buy Nvidia stock that has split is the company’s valuation.

On the surface, one could make the argument that NVIDIA is still fairly cheap: The company’s shares are trading at about 31 times Wall Street’s expected earnings per share (EPS) for fiscal 2026 (NVIDIA’s fiscal year ends in January), and Wall Street is expecting earnings growth of about 46% annually over the next five years.

But when measured by trailing 12-month price-to-sales multiple, Nvidia is reminiscent of the peak of the dot-com bubble. Nvidia’s trailing 12-month price-to-sales multiple is comparable to that of Amazon and Cisco Systems Just a few months before the dot-com bubble burst.

Given that the next big innovation is inevitably going to end up with a bubble bursting at some point, this valuation premium is a concern that should not be ignored.