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Anyone who said that NVIDIA‘S (NASDAQ: NVDA) The stock price would collapse once their prediction came true. But not in the way they expected.

Nvidia conducted a 1:10 stock split after the market closed on Friday, June 7, 2024. The share price was approximately 10% of the previous closing price at the market opening on Monday.

The stock has risen nearly 30% since Nvidia announced its stock split in its first-quarter update on May 22. Is it too late to buy Nvidia stock after the split?

A simple answer

There is a simple answer to this question: It is absolutely not too late to buy Nvidia stock. Why is this answer so simple? The stock split does not change the company’s business.

A stock split does two things. First, it increases the number of shares outstanding. In Nvidia’s case, the number of shares has increased tenfold. Second, this increase lowers the share price by a proportional amount.

Did you want to buy Nvidia before the stock split because demand for graphics processing units (GPUs) was soaring? Were you interested in the stock because of the prospects for the upcoming Blackwell platform? Those reasons to buy remain. The only difference between now and before the stock split is that Nvidia’s stock price is much cheaper.

Granted, it’s possible that Nvidia shares could fall even further after the big run-up before the stock split. On the other hand, the stock’s momentum could accelerate if retail investors who had previously held off due to the sky-high share price start buying Nvidia.

A more difficult answer

Now for a more difficult answer to the question. The optimal time to buy Nvidia may have passed for reasons that have nothing to do with the stock split.

Demand for Nvidia’s chips remains exceptionally strong. The company’s revenues and profits continue to soar. However, some would argue that all of this is already factored into Nvidia’s stock price.

The stock is trading at almost 71 times the earnings of the last 12 months and almost 47 times the forward earnings. These valuation metrics reflect a lot of expected growth. Even Nvidia’s price-earnings-growth (PEG) ratio of 1.51, based on five-year growth forecasts, is not particularly attractive.

Is there anything that could realistically slow Nvidia’s growth? The answer to that question is a resounding “yes.” Other chipmakers are trying to challenge Nvidia’s market dominance, and some of the company’s biggest customers are also developing their own chips to reduce their dependence on Nvidia.

The Pelosi strategy

If you want to profit from Nvidia but are concerned about its growth, there is another approach. You could call it “the Pelosi strategy,” after Paul, the husband of former House Speaker Nancy Pelosi.

Mr. Pelosi has invested in Nvidia by purchasing deep-in-the-money call options with an expiration date of at least one year. The call options give him the right (but not the obligation) to buy Nvidia stock in the future. These options have strike prices that are deep-in-the-money (well below the stock price at the time the options are purchased). This means that their price is highly correlated with changes in Nvidia’s stock price.

Importantly, this approach lowers Pelosi’s risk. He doesn’t have to put up as much money because buying call options is cheaper than buying the equivalent number of Nvidia shares that those options entitle him to buy.

Investors should remain optimistic that Nvidia will execute on Pelosi’s strategy. The good news is that there is reason for optimism about the stock and the company that has nothing to do with the recent stock split.

Should you invest $1,000 in Nvidia now?

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Keith Speights does not own any stocks mentioned. The Motley Fool owns Nvidia and recommends the company. The Motley Fool has a disclosure policy.

Is it too late to buy Nvidia after the stock split? was originally published by The Motley Fool

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