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Understanding Stock Splits: A Catalyst for Growth
Companies that decide to split their stocks are often experiencing significant growth, leading to soaring share prices. It is not unusual for a rapidly growing company to conduct multiple stock splits over several years. A notable example is Nvidia, a leading chip supplier, which has split its stock six times over the past 25 years, including twice since 2021.
What is a Stock Split?
The most common type of stock split is a forward stock split. The primary aim here is to make the company’s share price more accessible to investors. However, it is crucial to understand that while a stock split increases the number of shares you own, it simultaneously reduces the share price. As a result, the overall value of your investment remains unchanged post-split.
Evaluating the True Value
While stock splits may seem enticing, they should not be the sole reason to invest in a company. The key is to assess a company’s growth trajectory and future opportunities. If the stock is reasonably priced relative to its growth, there may be potential for a rewarding investment. Below, we explore two growth stocks that have recently undergone a 10-for-1 split, which you can purchase today for under $200.
Top Growth Stocks to Consider
Nvidia: A Powerhouse in the Chip Industry
Nvidia has been one of the top-performing stocks over the last decade, with shares skyrocketing by 24,000% since 2014. The company has embraced stock splits twice in the past five years, including a 4-for-1 split in 2021, followed by a 10-for-1 split in June this year, reducing its share price to an affordable $118.
Current Challenges and Future Prospects
Recently, Nvidia’s stock has experienced some volatility as investors focus on short-term growth challenges. The launch of its Blackwell GPU architecture has been delayed, and Nvidia faces export restrictions and increasing competition in China. Despite these issues, Nvidia’s China business saw growth last quarter.
In the U.S., major customers like Amazon Web Services (AWS) are developing their own chips for AI workloads due to the high demand and prices of Nvidia’s GPUs. However, Nvidia’s revenue grew by 122% year over year in the fiscal second quarter, thanks to the unmatched general-purpose computing power of its GPUs.
Looking Ahead
Nvidia anticipates a 79% increase in fiscal Q3 revenue compared to the previous year. With the enterprise AI wave gaining traction across industries, there’s a strong expectation for Blackwell to see robust demand starting in fiscal Q4. Analysts forecast a 40% increase in Nvidia’s earnings to $3.99 next year, with potential for the stock to reach $200 by the end of 2025, offering an upside of 69%.
Broadcom: A Leader in Networking and Software Solutions
Broadcom is another chip stock that has provided exceptional returns to investors in recent years. The company, a leading supplier of networking and software solutions for data centers, executed a 10-for-1 forward split on July 15, bringing its share price to $167.
Growth Drivers
Broadcom is strategically positioned for long-term growth in the AI market, having invested in AI around a decade ago. This investment is now yielding results, with revenue from custom AI accelerators tripling in Q2 compared to the previous year.
Key Partnerships
Broadcom’s smartphone business, a core supplier for Apple, stands out as a significant catalyst. As part of Apple’s $430 billion investment in the U.S. economy, a long-term deal was struck with Broadcom in 2023 to supply wireless connectivity and other components for Apple devices. Broadcom anticipates a 20% sequential growth in wireless revenue in Q4, driven by strong demand for Apple’s upcoming iPhone models.
Long-Term Outlook
Analysts are optimistic about Broadcom, as some business risks, such as sluggish smartphone sales, have already been addressed. The company’s strong exposure to AI infrastructure growth supports its promising long-term prospects. Currently trading at a forward P/E of 27 based on next year’s earnings estimate, analysts project an annualized earnings growth of 19%, making Broadcom a solid investment for the future.
Should You Invest in Nvidia Now?
Before diving into Nvidia stock, consider this: The Motley Fool’s Stock Advisor analyst team recently identified what they believe are the 10 best stocks for investors to buy right now, and Nvidia wasn’t on that list. The 10 chosen stocks have the potential to deliver substantial returns in the coming years.
Reflect on when Nvidia made this list on April 15, 2005. If you had invested $1,000 at that time, you would have $710,860 today!
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