Up 1,940% since 2019, is NVIDIA stock only just beginning?

Our writer digs into why NVIDIA stock has performed so incredibly well in recent years — and considers whether he is too late to invest.

| More on:
A pastel colored growing graph with rising rocket.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As an investor, sometimes a share is the stuff of dreams. AI stock market darling NVIDIA (NASDAQ: NVDA) looks like a case in point. If I had invested £10,000 in NVIDIA stock just five years ago, I would now be sitting on a holding worth over £200,000 thanks to a 1,940% increase in the price over that period!

(I would also be earning dividends, by the way, although with the yield currently sitting at 0.02%, I think it is the price appreciation that I would be more excited about!)

But five years ago, NVIDIA was already a large, well-established company. Its 2019 revenues were $11.7bn and net income was $4.1bn.

So that huge price jump in NVIDIA stock was for a company that was already in clear view of many stock market investors.

I missed that incredible five-year run. But if I invested now, might I benefit from another?

Massive potential

At first glance, that might seem fanciful.

NVIDIA has a market capitalisation of more than $2tn, higher than tech shares like Alphabet and Amazon.

A further 1,940% share price growth would mean a market capitalisation well in excess of $40tn, way beyond anything that has ever been seen before.

On the other hand, I think NVIDIA has huge potential.

Despite the hefty market cap, its current price-to-earnings (P/E0 ratio is 72. But earnings last year jumped almost seven times. If they did that again, the prospective P/E ratio at the current NVIDIA stock price would barely be in double digits.

I do not think earnings will keep growing at anything like last year’s rate.

But I do expect long-term earnings growth from the chip giant. AI means demand for chips has surged – and very few companies have the necessary know-how to meet it. NVIDIA does, which is why its business has been booming.

Attractive economics

Let us go back to those figures from five years ago.

They demonstrated an attractive feature of the business that has endured: high profitability. $4.1bn from $11.7bn suggests a net profit margin of 35%.

Last year was even better: the company achieved a net margin of 49%.

As sales grow, so should economies of scale. Not only that, but AI has seen demand for chips explode. Unveiling its most recent quarterly results last month, NVIDIA’s chief executive said, “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide”.

Valuing the shares

Still, sometimes demand booms can fizzle out disappointingly.

While customers are splashing the cash now on chips to build their AI capabilities, once the initial demand is filled, sales growth could fall sharply.

Scaling to meet surging demand could add fixed costs to NVIDIA’s business. Other chip companies are also working hard to win new business, something that could ultimately hurt profit margins across the industry.

I would be surprised to see NVIDIA stock grow 1,940% in the coming five years. For now, its valuation is still too high to give me the margin of safety I like when investing, so will not be buying its shares.

But, if things go right, I do think NVIDIA stock could rise in coming years albeit perhaps less dramatically. So I am keeping my eyes out for any price fall I think offers me an attractive buying opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Amazon, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »

Investing Articles

The Aviva dividend yield’s already over 7%. Could it go higher?

Christopher Ruane explains why he thinks the Aviva dividend could be on course to grow this year and beyond. Might…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

NIO stock has crashed! Here’s why I still wouldn’t touch it with a bargepole

I've been watching NIO stock falling heavily, and wondering when might be a good time to get in cheaply. Here's…

Read more »

Investing Articles

Why have Rolls-Royce shares fallen this week?

Rolls-Royce shares remain the best performing on the FTSE 100 over the past year, but there's been some pullback. Dr…

Read more »

Investing Articles

With a 4.3% yield, I consider this FTSE company an exceptional investment

Oliver Rodzianko say this FTSE company is focused on quality and long-term survival. As such, he thinks he'll hold it…

Read more »

Investing Articles

How I’d invest £10,000 in a Stocks & Shares ISA and aim for a £45,500 second income

Millions of us aren’t earning the second income we deserve. Here, Dr James Fox explains how he’d get his savings…

Read more »