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NVIDIA (NASDAQ: NVDA) stock is up 2,712% in five years, 31,141% in 10 years, and a staggering 366,732% since its initial public offering in 1999. This shows how rewarding long-term stock investing can be.
It also shows how the chips (no pun intended) are stacked in favor of foolish investors. I can only lose 100% of my investment in a stock (as long as I don't buy on margin), but the potential gains are, in theory, unlimited.
One figure that really surprises me is that Nvidia's market capitalization has increased by a staggering $3.2 trillion in just two years. To be clear, it's billions!
Nvidia is now a hair's breadth ahead Apple again 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.
The case of the bull
Nvidia is the undisputed leader in artificial intelligence (ai) chips. But whether their profits continue to grow like wildfire depends on the extraordinary capital spending of large cloud service providers. The main ones are amazon web services (AWS), microsoft azure, and AlphabetIt's Google Cloud.
Other tech companies shelling out money for Nvidia chips include Metaplatforms (for their big language open source Llama models) and tesla (for its humanoid and autonomous robot initiatives).
The good news for Nvidia investors is that ai-related spending shows no signs of slowing down. Here's a selection of recent quotes to set off the Nvidia bulls.
- Taiwan Semiconductors (TSMC) CEO CC Wei: “We continue to see extremely strong ai-related demand from our customers during the second half of 2024..” TSMC makes Nvidia's ai chips.
- Mark Zuckerberg, CEO of Meta: “It is difficult to predict how (ai) It will be a trend for several generations in the future…But at this point, I prefer to risk building capacity before it is needed and not too late.”
- Jensen Huang, CEO of Nvidia: “Blackwell Lawsuit (Nvidia's newest ai chips) It's crazy… Everyone wants to have the most and everyone wants to be first..”
The case of the bear
I would say the biggest risk is an unexpected slowdown in ai spending, driven by disappointing returns on investment in the technology. ai could disrupt many areas, but it won't change the fundamental reality of business (companies need to make profits on their investments to deliver value to shareholders).
A slowdown would disproportionately affect Nvidia because most of its sales come from a small handful of companies. The company's four largest clients now account for more than 40% of revenue.
This risk is intensified due to the very high price-to-sales (P/S) ratio of 37.
Average cost in pounds
I don't think it would be crazy for me to invest in Nvidia today, assuming I was taking a long enough view. But I would do so with caution given the high valuation. Even the best companies in the world can make bad investments if they are bought at the wrong price.
Impulsive behavior, particularly FOMO (fear of missing out), is an investor's worst enemy. As Warren Buffett has said: “The stock market is a device for transferring money from the impatient to the patient..”
Nvidia is a volatile stock that can drop more than 50% in a few months. So if I wanted to invest I would consider a pound cost averaging strategy.
That is, you would not invest a single lump sum. Instead, I would use share price pullbacks to build my position over time.
