By Since the start of 2023, no trend on Wall Street has garnered more attention from investors than the rise of artificial intelligence (AI). But over the last eight months, the excitement surrounding stock splits in top-notch companies has played a close second fiddle.
A stock split allows publicly traded companies the option of cosmetically adjusting their share price and outstanding share count by the same factor. The “cosmetic” aspect of splits has to do with the fact that they don’t alter a company’s market cap and have no impact on underlying operating performance.
This stock-split stock’s parabolic move higher looks unsustainable
However, not all stock-split stocks are necessarily worth buying. Even though companies conducting forward splits have historically outperformed the benchmark S&P 500 in the 12 months following their split announcement, the one I’d suggest shying away from in the fourth quarter (and beyond) is artificial intelligence kingpin Nvidia (NASDAQ: NVDA). Nvidia completed its historic 10-for-1 split in June.
To be fair, Nvidia has done a lot of things right. Its AI-graphics processing units (GPUs) are the undisputed top choice among businesses building out high-compute data centers. After accounting for an estimated 98% of AI-GPUs that were shipped to data centers in 2022 and 2023, Nvidia looks to have ceded very little market share, thus far, in 2024.
Nvidia is also getting plenty of help from its CUDA software platform. CUDA is the toolkit developers use to build large language models and maximize the computing capacity of their Nvidia AI-GPUs. The best way to think of CUDA is as the lure that keeps businesses loyal to Nvidia’s ecosystem of products and services.
But in spite of these early stage advantages, Nvidia offers a number of red flags that should give investors pause.
For instance, competition is an inevitability for Nvidia. Even if its H100 and Blackwell GPUs maintain their computing advantage, the extensive backlog for Nvidia’s hardware, coupled with cheaper price points for competing chips, could have businesses looking elsewhere for their data center needs.
Internal competition shouldn’t be overlooked, either. All four of Nvidia’s top customers by net sales are developing AI-GPUs for use in their data centers. This looks to be a clear signal that America’s most-influential businesses want to lessen their reliance on the AI kingpin’s hardware.
Another reason Nvidia’s parabolic ascent is worrisome has to do with what its insiders are telling us. Specifically, CEO Jensen Huang has been a persistent seller of his company’s stock since mid-June, and no insider has purchased shares of Nvidia on the open market since December 2020. If insiders don’t view their stock as a bargain, why should everyday investors?
Perhaps the biggest red flag with Nvidia is that no game-changing technology or innovation for 30 years has avoided a bubble-bursting event early in its existence. Put another way, the investing community has regularly overestimated the adoption/uptake of next-big-thing technologies. When these lofty expectations fail to come to fruition, the music inevitably stops for hyped innovations.
Considering that a majority of businesses still lack a clear game plan as to how they’ll generate a positive return on their AI investment, we appear to be witnessing the early stages of a bubble-bursting event play out. If and when the AI bubble burst, no company is likely to be hit harder than Nvidia.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
1 Bargain-Basement Stock-Split Stock to Buy Hand Over Fist in the 4th Quarter and 1 Highflier to Shy Away From was originally published by The Motley Fool
