Investors and market analysts are buzzing with excitement as Nvidia prepares for its upcoming stock split on June 7th. Stock splits, which involve dividing a company’s existing shares into multiple new shares, are generally seen as administrative exercises to make shares more affordable and increase liquidity. For Nvidia and its investors, this split is a celebratory milestone, symbolizing the company’s soaring stock price and robust market performance. Notably, Nvidia’s decision to split each share into ten, while Alphabet and Amazon previously split their shares into twenty, underscores the significant gains these tech giants have made. This phenomenon raises intriguing questions about the relevance of traditional valuation metrics and the potential lessons for Bitcoin investors.
Historically, stock splits were thought to be neutral events, primarily aimed at reducing share prices to facilitate smaller trades. However, the astronomical stock prices of companies like Nvidia, Alphabet, and Amazon have rendered traditional valuation methods, such as dividend yields, seemingly obsolete. Amazon, for example, has never issued a dividend, and Alphabet plans to pay its first-ever dividend of 20 cents per $175 share. Nvidia’s quarterly dividend will be a mere one cent per share post-split, priced around $120. Clearly, these modest payouts do not justify the impressive returns seen by these stocks.
The divergence between low dividend yields and high stock returns has reignited a long-standing debate among economists and investors. Some argue that low yields suggest either future dividend increases or poor returns. Extensive academic research supports the latter view, indicating that low yields historically predict weaker returns. Despite this, a faction of investors believes that high stock prices reflect expectations of future dividend growth. This perspective has proven profitable for those who invested in tech giants like Alphabet, Amazon, and Nvidia, raising the question: Could this be the correct approach?
Economists Andrew Atkeson, Jonathan Heathcote, and Fabrizio Perri have contributed to this debate with a recent working paper. They propose that stock prices and dividends from 1929 to 2023 can be explained by expected future dividends relative to aggregate consumption. Their model suggests that prices only move when investors receive new information altering their dividend expectations. This viewpoint contrasts with the alternative theory that stock prices are influenced by various factors, including risk appetite, cost of capital, and market volatility.
John Cochrane’s influential 2011 paper argued that changes in discount rates, rather than dividends, drive stock price variations. Atkeson, Heathcote, and Perri’s model, which includes a variable for “expected dividends,” appears to align with Cochrane’s findings. Critics might argue that their “expected dividends” variable could equally represent risk appetite, thus not challenging the prevailing theory.
So, what does this mean for today’s high-flying tech stocks with low yields? One interpretation is that modern investors have better forecasting tools, making past patterns irrelevant. Alternatively, the diminished role of dividends might suggest that earnings are a more accurate indicator of stock value. Firms like Nvidia, valued at over 100 times its recent full-year earnings, may be expected to deliver exceptional growth. However, history warns that investors might be repeating the error of believing “this time is different.”
Drawing parallels to the cryptocurrency market, especially Bitcoin, offers valuable insights. Bitcoin, much like tech stocks, operates on the expectations of future value rather than traditional income metrics. Bitcoin does not generate dividends or cash flows, and its value is driven by market sentiment, technological advancements, and macroeconomic factors. The exuberance seen in the tech sector could mirror Bitcoin’s trajectory, where high volatility and speculative investment dominate.
Investors in Bitcoin should take note of the lessons from the tech sector. The significant stock splits and the underlying factors driving tech stock valuations emphasize the importance of future expectations and market sentiment. Bitcoin investors often rely on similar dynamics, speculating on future adoption, regulatory changes, and technological improvements.
Moreover, just as stock splits aim to make shares more accessible, efforts to democratize Bitcoin trading, such as fractional ownership and user-friendly platforms, aim to broaden its investor base. This accessibility could enhance Bitcoin’s liquidity and market stability, much like stock splits do for traditional equities.
In conclusion, the upcoming Nvidia stock split, and the broader discussion on stock valuations, offer valuable perspectives for Bitcoin investors. Both markets are driven by future expectations and investor sentiment rather than traditional income metrics. As the financial landscape evolves, understanding these dynamics will be crucial for making informed investment decisions in both tech stocks and cryptocurrencies.
