Nvidia (NASDAQ: NVDA) stock has been all over the place lately, dropping 7% one day and bouncing back 6% or more the next. These daily swings are enough to give shareholders a serious case of whiplash!
From an intraday peak of $140, the share price has now fallen around 17% to $116. Yet the stock’s still up a mind-boggling 2,800% in five years. So those who bought on previous dips have seen their investments skyrocket.
Should I invest on this pullback? Let’s take a look.
From million to trillions
Research by economist Hendrik Bessembinder reveals that just 83 US companies from nearly 26,000 generated half of the $47trn in shareholder wealth generated between 1926 and 2019.
Astonishingly, only about 1,000 stocks out of 26,000 created all the $35trn of wealth beyond the returns of risk-free Treasury Bills. Therefore, more than 96% of companies weren’t really worth investing in.
But Nvidia certainly has been. Its shares went public in 1999 at around $0.04 apiece on a split-adjusted basis. The market cap was approximately $626m. Fast-forward to today, and the chipmaker is a $2.86trn titan that’s worth more than the entire London Stock Exchange (around $2.5trn).
Asymmetric returns
Indeed, Nvidia tops the list of US stocks with the highest annualised returns in the last couple of decades. Up to December 2023, it had turned every $1 invested into a staggering $1,316!
| Years | Cumulative gross return per $1 | Annualised compound return (%) | |
|---|---|---|---|
| Nvidia | 25 | $1,316 | 33.38% |
| Netflix | 21.5 | $406 | 32.06% |
| Amazon | 26.5 | $1,551 | 31.78% |
| Axon Enterprise | 22.5 | $452 | 31.13% |
These returns will be even better now because all four stocks have risen higher since December.
- Nvidia is up 134.5% year to date
- Netflix +33.1%
- Amazon +12%
- Axon +42.8%
Nvidia’s compound annual growth rate since going public is now more like 40%! This shows the substantial rewards that can be gained from investing in and holding top-tier stocks over the long term.
Nvidia shares don’t just always go up
Bessembinder’s research also highlights that Nvidia investors should brace for significant drawdowns. The share price has plunged more than 50% several times in the last 20 years.
These included a 60% decline in 2011-2012 due to weak chip demand and a 57% drop across 2018-2019 following the cryptocurrency crash (Nvidia’s GPUs were used heavily in crypto mining). Then there was the 67% loss in 2021-2022 amid the tech sell-off leading up to the release of ChatGPT.
Given Nvidia’s lofty forward earnings multiple of 42, a 17% pullback is minor compared to what could happen if AI spending suddenly slows or the company fails to meet growth expectations.
Moreover, the semiconductor industry remains cyclical, meaning Nvidia’s earnings are vulnerable to sharp drops in demand. Hard to believe right now, I know.
A golden opportunity?
The chipmaker reports Q2 earnings on 28 August and I’m pretty optimistic we’ll see more eye-popping growth due to elevated AI spending from the likes of Amazon, Microsoft, and Alphabet.
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’ll reconsider the stock.
For now though, I don’t think a 17% pullback is enough to justify me running out to invest in Nvidia.
