(Tech stock columnist Jon D. Markman publishes Strategic Advantage, a lively, lucrative guide to investing in the digital transformation of business and society. Click here for a free trial.)
Nvidia ( (NVDA) - Get NVIDIA Corporation Report) shares have been on a roll lately. Investors are even more pumped than usual about prospects at the San Jose, Calif.-based graphics chip company. This is why traders should get ready to sell.
On Wednesday, Nvidia common stock will split 4-for-1. Managers announced the distribution in late May and shares bounced 28% higher over the next eight weeks.
There is every reason to believe Nvidia stock is headed for a correction.
Operationally Nvidia is firing on all cylinders. First quarter revenue soared to $5.66 billion, up 84% year-over-year. Earnings per share jumped to $3.03, a rise of 106%. Nvidia’s best-in-class silicon is finding its way into more artificial intelligence setups at hyperscale data centers, supercomputers and even automobiles. I have been recommending the stock for the past 20 years.
Yet traders should be concerned about the mechanics of stock splits, especially for high profile technology firms such as Nvidia. Shares tend to run up on news of the split, then sell off following the allocation.
There is precedent.
Apple ( (AAPL) - Get Apple Inc. Report) announced a 4-for-1 stock split in late July 2020 to shareholders of record August 31. Shares ran up from $95 to $134 ahead of the distribution, a gain of 41%. In the 2 weeks post-split shares traded back to $104, a loss of 22%.
The same fate befell Tesla ( (TSLA) - Get Tesla Inc. Report) shareholders. Managers at the electric maker announced in August 2020 a 5-for-1 split. Shares rose 81% ahead of the split, only to crater 34% later.
There is some good news though. Both Apple and Tesla shares went on to perform well through the end of 2020, rising 27% and 42% respectively.
And Jim Cramer said Monday that the current stock market correction will end when the biggest tech stocks finally roll over. Nvidia is the biggest semiconductor company in the United States by market capitalization.
Traders should get ready to sell Nvidia this week even if it is for just a few weeks.