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Nvidia (NASDAQ: NVDA ) stock has been all over the place lately, falling 7% one day and bouncing back 6% or more the next. This daily turnover is enough to give shareholders a serious case of whiplash!
From an intraday peak of $140, the price is now down nearly 17% to $116. Yet the stock is still up an impressive 2,800% in five years. So those who bought in the previous dips have seen their investments rise significantly.
Should I invest in this return? Let's take a look.
From millions to billions
A study by economist Hendrik Bessembinder reveals that only 83 US companies out of nearly 26,000 accounted for half of the $47trn in shareholder wealth generated between 1926 and 2019.
Incredibly, about 1,000 of the 26,000 stocks created the entire $35trn wealth beyond the return on risk-free Treasuries. Therefore, more than 96% of the companies were not really worth investing in.
But Nvidia was. Its shares went public in 1999 at about $0.04 each on a split basis. The market was estimated at $626m. Fast forward to today, and the chip maker is a $2.86trn titan worth more than anything else. London Stock Exchange (about $2.5trn).
Asymmetric restoration
Indeed, Nvidia tops the list of US stocks with the highest annual returns over the past few decades. Until December 2023, it has turned every $1 invested into an amazing $1,316!
| Years | Full refund for every $1 | Annual compound return (%) | |
|---|---|---|---|
| Nvidia | 25 | $1,316 | 33.38% |
| Netflix | 21.5 | $406 | 32.06% |
| Amazon | 26.5 | $1,551 | 31.78% |
| Axon Company | 22.5 | $452 | 31.13% |
These gains will be even better now because all four stocks have risen significantly since December.
- Nvidia is up 134.5% year to date
- Netflix +33.1%
- Amazon +12%
- Axon +42.8%
Nvidia's compounded annual growth rate since going public is now more like 40%! This shows the great rewards that can be gained by investing in and holding high quality stocks over the long term.
Nvidia's shares aren't just rising
Bessembinder's research also highlights that Nvidia investors should be looking for significant traction. The stock price has fallen more than 50% several times in the last 20 years.
This includes a 60% drop in 2011-2012 due to weak chip demand and a 57% drop between 2018-2019 following the cryptocurrency crash (Nvidia's GPUs have been widely used in crypto mining). Then there is a 67% loss in 2021-2022 during technology sales leading to the release of ChatGPT.
Given Nvidia's top-line earnings multiple of 42 times, a 17% pullback pales in comparison to what could happen if AI usage suddenly declines or the company fails to meet growth expectations.
In addition, the semiconductor industry remains cyclical, meaning Nvidia's earnings are vulnerable to a sharp drop in demand. Hard to believe right now, I know.
A good opportunity?
The chip maker reports Q2 earnings on August 28th and I'm very optimistic that we'll see dramatic growth thanks to higher AI spending from the likes of Amazon, Microsoftagain Alphabets.
Yet any tempering of investor expectations from management could upset the AI apple cart. If that happens and the market overreacts to the earnings report, I will reconsider the stock.
For now, though, I don't think the 17% pullback is enough to justify getting out of investing in Nvidia.
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