Artificial intelligence (AI) has become the biggest trend in the stock market in recent years. As with many other groundbreaking opportunities, some stocks have posted above-average gains.

Sometimes investors will pull out of stocks that have seen a large increase in price in a relatively short period of time. One reason is that the stock is viewed as too expensive given its new price. If shares rise high enough, a company’s management team may decide to perform a stock split to encourage new buying activity.

After a share price increase of 1,870% in just two years Super-microcomputer (SMCI -12.31%) At the beginning of August, the company announced a 1:10 stock split, which is to take place on October 1.

With just a few days left before the split, is this a lucrative opportunity to buy shares in the AI ​​darling?

A journey into the past

In a stock split, a company issues more shares, which causes the share price to fall. It is important to note that the number of shares issued and the share price should be inversely related, so that the overall valuation of the company remains the same as it was before the split.

Two major stock splits this year came from chip giants NVIDIA And BroadcomLet’s take a look at how trading activity evolved after the split of each company.

1. Analysis of Nvidia’s stock split

The following chart illustrates the return of Nvidia stock from the day it announced its own 1-for-1 split on May 22 through the close on September 20. The day the stock began trading on a split-adjusted basis (June 10) is marked in the purple circle with the letter “S.”

Data from YCharts.

Although shares are up 22% since the day the split was announced, there are underlying trends worth noting, as shown in the chart above. First, Nvidia stock saw a sharp rise in the days leading up to the split. Although this buying continued for a short time after the split, the euphoria appears to have been short-lived.

In July and part of August, Nvidia shares plummeted to levels more in line with pre-split valuations. This means that investors who bought Nvidia shares at the time of the split actually bought at a higher Valuation compared to the pre-split period, despite the appearance of a lower share price.

And now comes the kicker: Since June 10, when Nvidia shares were traded on a split-adjusted basis, the value has fallen by 5% until the stock market close on September 20.

2. Analysis of Broadcom’s share breakdown

Broadcom announced a 10-for-1 stock split on June 12 as part of its second quarter fiscal 2024 results. On July 15, Broadcom shares began trading on a split-adjusted basis.

Data from YCharts.

Shortly after the split was announced in June, Broadcom’s stock soared – as did Nvidia’s. In addition, like Nvidia, Broadcom’s stock price saw heavy selling activity shortly after the split was completed in July.

Since the start of split-adjusted stock trading on July 15, Broadcom traded unchanged until the close of trading on September 20.

Image source: Getty Images

An important insight into stock splits

You may be wondering why Nvidia and Broadcom stocks had such similar trading patterns at the time of their respective splits.

One likely contributor to volatility is momentum trading. Day traders often use momentum in the hope of making quick profits. One problem with this is that less experienced investors may follow this activity but end up being left with the costs after the traders sell their position.

But there were also a number of macro-level factors that played a role in the ups and downs of both stocks, which explains why the Nasdaq-Composite showed similar trends during the same period.

Data from YCharts.

Much of this selling was due to changing investor sentiment around AI, with some analysts raising alarms that shares may have risen too high too quickly. Moreover, this volatility continued into September as investors impatiently awaited the Federal Reserve’s decision to begin cutting interest rates.

Is Supermicro stock a buy ahead of the upcoming split?

Like Nvidia and Broadcom, Supermicro’s shares rose sharply after the split was announced in early August. However, the stock has fallen nearly 26% since the announcement.

Data from YCharts.

The ongoing sell-off at Supermicro is likely due to a combination of a mixed earnings report and a brief report from Hindenburg Research. High capital expenditures are having a noticeable impact on the company’s gross margin, raising concerns about liquidity and long-term earnings potential. Management has described the margin deterioration as a short-term issue related to the launch of a new product and supply chain issues.

Although Supermicro’s valuation has normalized somewhat due to the sell-off, I’m torn on whether or not this is a good buying opportunity right now.

The smartest thing to do is to sit on the sidelines and wait until after The shares will begin trading on October 1 on a split-adjusted basis. Over time, investors should be able to get a clearer picture of the claims made in the brief while also watching how the market reacts after the split is implemented.