Why Nvidia Stock Just Crashed – The Motley Fool

What happened

Shares of semiconductors giant Nvidia ( NVDA -5.20% ) crashed Monday morning, down 5.8% as of noon ET.

A downgrade from R.W. Baird appears to be to blame for Nvidia stock suffering today — but Baird isn’t entirely to blame. Part of this is Nvidia’s own fault.

Image source: Getty Images.

So what

But let’s start with the downgrade. This morning, an analyst at Baird pulled his buy rating from Nvidia and downgraded the shares to neutral — with a $225 price target that was below Nvidia’s closing price from Friday.

Demand for graphics processing chips is weakening, warned analyst Tristan Gerra in his note, and this is pulling down prices (and profit margins) for Nvidia. Chip “orders [too] are now being impacted,” warns the analyst, even as Nvidia continues buying up “wafer/substrate” capacity after more than a year of worrying about supply chain integrity during the Great Global Semiconductor Shortage. Potentially, this could result in a glut of graphics chips on the market, especially if cryptocurrency prices continue to slide, resulting in “a significant increase in graphic cards on the second-hand market,” says Gerra.

Now what

This, however, is only half the news weighing on Nvidia’s stock today. The other half comes from Nvidia itself, which over the weekend filed a PRE 14A form with the Securities and Exchange Commission, in which the company announced plans to double the number of shares it’s authorized to issue, from 4 billion common shares to 8 billion.    

Now, there are any number of reasons why Nvidia — which has fewer than 2.5 billion shares outstanding at present — might want to give itself the right to more than triple its share count. Investors selling Nvidia stock today may be leaning toward the less popular explanations, such as Nvidia wanting to issue a lot of stock options to its employees, or contemplating a major, dilutive acquisition of another company.

Personally, though, I’m of the opinion that with Nvidia’s stock up more than 50% over the past year, and demand for semiconductors still very strong (R.W. Baird’s worries notwithstanding), Nvidia may be contemplating a stock split — as multiple other high-profile tech companies have done in recent weeks. Considering that investors generally view stock splits as bullish stock moves, I further suspect that if Nvidia is planning to split its stock, then this is a move that will send Nvidia’s share price up, not down.

Long story short: Investors selling Nvidia stock on worries over the share issuance today may be making the exact wrong move.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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