During a stock split, a company multiples its shares outstanding to lower its stock price without changing its market capitalization -- the value of all its shares combined. Companies often do this to make their stock more attractive and affordable for smaller investors. And it is often taken as a bullish sign, even though it doesn't influence fundamentals.
Let's discuss why two recently split stocks, Nvidia (NVDA -1.99%) and Amazon (AMZN 0.58%), could be poised for continued long-term growth as they pivot to artificial intelligence (AI) technology.
1. Nvidia
Since its IPO at $12 in 1999, Nvidia has frequently experienced periods of exponential growth -- leading its management to split the stock a whopping five times to keep prices reasonable. The most recent stock split occurred in July 2021, and gave shareholders four shares for one. With the AI industry supercharging growth, investors aren't too late to bet on the company's continued success.
With the launch of OpenAI's generative AI chatbot, ChatGPT, many tech companies have been scrambling to launch and market their own competing platforms. But instead of joining that crowded field, Nvidia provides the hardware they need to train and run their models.
ChatGPT itself used 10,000 of Nvidia's industry-leading A100 GPU chips. And the company is protecting its moat with an even stronger chip called the H100, said to be a whopping nine times faster than its predecessor.
Nvidia's AI efforts are already showing in its operational results. Revenue soared by a staggering 101% year over year to $13.51 billion, driven by strength in the company's data center segment, which enjoyed a significant uptick in AI-related demand among enterprise clients. Nvidia's gaming segment is also recovering as it rolls out its latest-generation RTX 40 line of consumer graphics cards.
2. Amazon
In June 2022, Amazon completed a massive 20-for-1 stock split designed to improve liquidity and make shares more accessible to smaller investors. And while the company has faced some challenges with macroeconomic pressures in its e-commerce division, management's cost-cutting and a pivot to AI technology can power the next leg of sustainable growth.
Like Nvidia, Amazon is also focusing on the infrastructure side of the AI opportunity, which synergizes well with its cloud computing segment: Amazon Web Services (AWS). The company has built a platform called Bedrock, designed to be an easy way for developers to train and customize their own AI models on AWS while sparing them the difficulty of building these complex applications from scratch.
Amazon is also dabbling in the hardware side of the opportunity with custom chips designed to deliver low-cost, deep-learning performance for its clients.
Unlike Nvidia, Amazon's AI efforts are yet to make a big impact on its operational results. But its recent cost-cutting efforts have dramatically improved the bottom line. Operating income more than doubled year over year to $7.7 billion, while net income jumped to $6.7 billion from a loss of $2 billion in the prior-year period.
You get what you pay for in the market
After their rocket-ship rallies in 2023, Nvidia and Amazon are two of the more expensive megacap stocks on the market -- with price-to-earnings (P/E) multiples of 47 and 41, respectively. But investors should look at these high price tags in the proper context.
Nvidia and Amazon directly benefit from the infrastructure side of the AI industry. They also have strong economic moats to protect their long-term market share. But while both companies are strong buys, Amazon looks to be the safer pick because of its more diversified business model and potential for significant profitability gains as management continues to cut costs. Nvidia is more expensive, but it stands to gain the most from the growth in AI adoption.
