Missed out on Nvidia stock? Here’s what I’m looking for next time!

After Nvidia stock soared almost 3,500% in five years, our writer has learned some lessons he hopes may help him spot future stock market stars.

| More on:
Illustration of flames over a black background

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.

To say that Nvidia (NASDAQ: NVDA) has been having a good run of it is putting things mildly. This week, the chipmaker became the world’s most valuable listed company. Nvidia stock is on fire – it is up 181% just since the start of the year. Over five years, it has soared 3,477%!

Opportunities for that sort of return might not come along very often. But, as the stock has shown, they do come along sometimes.

Perhaps, like me, readers missed out on the opportunity to invest in it before its dizzying share price ascent. Rather than dwelling on that, I have been thinking about what I should look for when scouring the market for what might turn out to be the brilliant opportunities of tomorrow.

Big market potential

The rise of the stock has given me some useful food for thought.

Its huge price gain recently has been driven by the explosion of interest in artificial intelligence (AI). But even before that, it was making significant sales. AI has simply added to the already massive size of the market for semiconductors.

Its revenues last year were $60bn. To become the world’s most valuable company, I think it is important to operate in a market that not only has great potential but already has very high actual sales.

Barriers to entry – and competitive difference

Of course, such markets often attract a rash of competitors.

Here, I think, the Nvidia price reflects two advantages it has.

First, the barriers to entry in its industry are unusually high. Even with strong funding and a great team, setting up a chipmaker is a very slow process. It takes years if not decades to build the necessary research and manufacturing facilities then get them operational.

Secondly, it has what Warren Buffett calls a ‘moat’.

In other words, it has successfully differentiated itself even from other chipmakers. For example, it has proprietary chip designs that customers cannot get unless they buy from Nvidia. Creating such competitive differentiation can be an expensive business – but it can pay off in bucketloads.

Pricing power

Still, lots of companies have a strong competitive edge in a massive industry, but come nowhere near the current market capitalisation of the firm.

Chips are so fundamental to many of its clients’ businesses that it has pricing power. It can charge high prices – and customers are still willing to pay. That is good for earnings, which in turn has helped propel the the share price.

Last year, tbe company’s net income on that $60.9bn revenue was $29.8bn. In other words, its net profit margin is close to 50%.

Compare that to US retail giant Walmart. It has a number of competitive advantages in a market with huge demand. Its revenues last year were over 10 times Nvidia’s. But its net income, at $15.5bn, was barely half that of the chipmaker.

Walmart is a massively successful company, yet its market capitalisation is less than one sixth that of Nvidia’s. I think that is partly down to Walmart’s pricing power being far weaker than that of the chipmaker.

Looking to the future – now

By learning from the incredible jump in the Nvidia share price and some of what underpins it, I hope I can spot potential stock market success stories in their infancy.

I am doing that today!

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Walmart. 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

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »