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Nvidia (NASDAQ: NVDA ) stock is up 2,712% in five years, 31,141% in 10 years, and a jaw-dropping 366,732% since its IPO in 1999. This shows how rewarding long-term investing can be.
It also shows how the chips – no pun intended – are stacked in favor of Smart investors. I can only lose 100% of my investment in the stock (as long as I don't buy on margin), but the potential gains in theory are not limited.
One statistic that blows my mind is that Nvidia's market cap has increased by $3.2trn in just two years. To be clear, that's billions!
Nvidia is now a hair's breadth away from passing an apple and to become the most valuable company in the world. This makes me wonder if it would be crazy for me to buy the stock today.
A case of bull
Nvidia is the undisputed leader in artificial intelligence (AI) chips. But whether its profits continue to grow like wildfire depends on the incredible costs of large cloud service providers. The main ones are Amazon Web Services (AWS), Microsoft Azure, too AlphabetsGoogle Cloud.
Other tech companies looking for Nvidia chips include Meta Platforms (in its models of the large Llama language) and Tesla (with its autonomous and humanoid robotic systems).
The good news for Nvidia investors is that AI-related spending shows no signs of slowing down. Here's a selection of the latest quotes for Nvidia bulls to tread on.
- Taiwan Semiconductor (TSMC) CEO CC Wei: “We continue to see strong AI-related demand from our customers in the second quarter of 2024.” TSMC makes Nvidia AI chips.
- Meta CEO Mark Zuckerberg: “It's hard to predict how [AI] it will tend to many generations in the future…But at this point, I'd rather risk building dosage before it is needed rather than too late.”
- Nvidia CEO Jensen Huang: “Blackwell's demand [Nvidia’s newest AI chips] you are crazy…Everyone wants to have more, and everyone wants to be ahead.”
Bear bag
I would say the biggest risk is an unexpected slowdown in AI spending, driven by disappointing returns on investment in the technology. AI may disrupt many areas, but it will not change the basic reality of business (companies need to make a return on their investment to deliver shareholder value).
The price drop will have a negative impact on Nvidia because the bulk of its sales come from a few smaller companies. The company's four largest customers now account for more than 40% of its revenue.
This risk is exacerbated by the stock's high price-to-sales (P/S) ratio of 37.
Cost estimate
I don't think it would be completely crazy for me to invest in Nvidia today, I think I'm taking enough of a view. But I will do that carefully if I look at the high rating. Even the best companies in the world can be bad investments if they are bought at the wrong price.
Ambivalence, especially FOMO (fear of missing out), is an investor's worst enemy. As Warren Buffett said, “The stock market is a tool for transferring money from the impatient to the patient.”
Nvidia is a volatile stock that could drop 50%+ in a few months. So, if I wanted to invest, I would consider a pound cost balancing strategy.
That is, I will not invest a single sum of money. Instead, I will use pullbacks in the share price to build my position over time.
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