“Should I be buying that artificial intelligence (AI) company—the one that just did a stock split?” That was a question I heard from several Canadian investors in the week leading up to Nvidia’s 10-for-1 stock split on June 10. Many callers couldn’t even name the company or describe its business. They had simply heard the share price was about to drop from roughly $1,200 to about $120 (all figures in U.S. dollars) and assumed the lower price meant a bargain.
It’s important to understand that a stock split is not a bargain. While shareholders do receive additional shares—nine extra shares for every one in a 10-for-1 split—the total value of their holdings doesn’t change. Whether you hold 10 shares at $120 each or one share at $1,200, your investment value is the same. The appeal of a split is psychological: people like owning more shares of a company they believe in. A lower per-share price can make a stock seem more accessible, but it does not alter the underlying valuation.
What is Nvidia? Why should investors care?
Nvidia, founded in 1993, began as a developer of 3D graphics for gaming and multimedia. The company introduced the graphics processing unit (GPU) in the late 1990s, a technology that revolutionized computing for graphics and later became pivotal for AI workloads. Nvidia formally entered the AI arena around 2012 and has since become a leading designer of advanced semiconductor chips, systems and software used to deploy AI across enterprise applications. As more companies seek to adopt generative AI and accelerate machine learning projects, demand for Nvidia’s products has surged.
The payoff has been dramatic. Nvidia has repeatedly reported record-breaking results, and its share price has risen sharply in recent years. In 2023 the stock climbed more than 230%, and so far this year shares were up roughly 140% at the time of writing. For a period the company briefly ranked as the world’s second-largest by market capitalization, with a valuation above $3 trillion. That rapid ascent is why Nvidia attracts so much attention from individual and institutional investors alike.
What’s a stock split?
A stock split is a corporate action that increases the number of outstanding shares while reducing the price per share proportionally, leaving the total value unchanged. For example, owning 100 shares of a $50 stock equals $5,000. After a two-for-one split you would own 200 shares at $25 each, still totaling $5,000. Companies often split shares to make them feel more affordable and to increase liquidity, but the split itself does not change the company’s fundamentals.
What does Nvidia’s 10-for-1 stock split mean?
A 10-for-1 split increases the number of shares available and lowers the price per share, but it does not change the company’s valuation or earnings potential. For investors with limited cash, a lower nominal per-share price may make it easier to buy whole shares, but it does not create a new buying opportunity by itself. True opportunity depends on valuation and future earnings potential, not the nominal share price.
Some investors misinterpret a lower share price as cheaper. In reality, the company’s valuation—expressed through metrics like price-to-earnings (P/E) or price-to-earnings-growth (PEG)—remains the key consideration. At the time of writing, Nvidia traded at around 42 times forward earnings, a relatively high multiple that reflects lofty growth expectations.
How to determine a stock’s value
Price alone doesn’t indicate whether a stock is a good value. The P/E ratio is a common starting point: it compares the current share price to earnings per share. But I prefer to look beyond current earnings and use the PEG ratio, which adjusts the P/E for growth expectations. That helps indicate whether a stock’s current price fairly reflects its expected earnings growth.
When evaluating a company, consider these questions:
- Is the company profitable now?
- Is its earnings growth likely to outpace the growth implied by the share price?
Nvidia’s recent results have been impressive: at the time of writing the company reported quarterly revenue of roughly $26 billion, showing very strong year-over-year growth. However, extraordinarily high growth rates are rarely sustainable indefinitely. Rapid expansion tends to slow as companies mature and competition increases.
What Canadian investors should consider when thinking about buying or selling stocks
Nvidia has a strong track record and a strategically important position in AI infrastructure. That said, it is reasonable to expect growth to moderate eventually. When a company reaches the top of its market, further appreciation typically slows and the share price can decline if earnings growth disappoints. For that reason, I have been trimming positions incrementally as the stock has risen—locking in gains while managing downside risk—rather than adding aggressively at current valuations.
If you’re a Canadian investor contemplating a purchase or sale, be analytical. Consider valuation metrics such as the PEG ratio, evaluate how the investment fits within your overall portfolio and asset allocation, and weigh it against your risk tolerance and long-term goals. Buying into a company solely because its per-share price is lower after a split is not a reliable strategy; focus on fundamental value and how the position aligns with your financial plan.
Further reading about stocks
- Best Canadian equity ETFs
- Top dividend-paying stocks in Canada
- Recent market trends affecting Canadian sectors
- How to assess earnings reports and company guidance