Unless you’ve been living under a rock for the past couple of years, you’ll be aware of the monster rally in Nvidia (NASDAQ: NVDA) stock. It’s now up 3,000% in just five years!
This made many a Fool happier and richer, given the stock was repeatedly recommended across multiple services by The Motley Fool across many years.
To be fair, others long banged the drum too. CNBC’s Jim Cramer even named his dog ‘Nvidia’ in 2017!
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All about the AI
The firm primarily makes its money from two areas. There’s gaming, it’s original focus, where its graphics processing units (GPUs) accelerate the processing of visuals in computers. Then there’s data centres (83% of revenue), where its GPUs are used in tasks like running artificial intelligence (AI) programmes.
It’s obviously been the AI-driven data centre growth that has put rocket boosters under the share price. Indeed, Nvidia did a 10-for-1 stock split earlier this year because it had soared past $1,000 per share.
However, this wasn’t the first time the chipmaker’s done a split since going public in 1999. There are five before that:
- 2021: 4-for-1 split
- 2007: 3-for-2 split
- 2006: 2-for-1 split
- 2001: 2-for-1 split
- 2000: 2-for-1 split
This means that a single Nvidia share bought in 1999 and held since would have spawned another 480 along the way. With the share price currently at $123, those 480 shares would now be worth $59,395 on paper.
Strong demand
Of course, it’s nice to ask ‘what if…’ questions, but all that’s in the past. What could Nvidia stock do from this point? Well, the firm now has a market-cap of $3trn, so it’s very unlikely to produce the same returns as in previous years.
Yet I’d be surprised if the next couple of quarters aren’t very strong. That’s just going off what its largest customers have been saying in the latest quarter.
For example, Meta CEO Mark Zuckerberg said recently that the firm’s next-generation AI model will require access to about 10 times the amount of computing power. He added that “future models will continue to grow beyond that.”
Needless to say, that’s bullish news for Nvidia moving forward.
FOMO
Longer term though, I don’t think the picture’s as clear. Demand will inevitably slow at some point and supply will catch up. That means Nvidia’s fat net profit margin — a mind-boggling 57% in Q1 — appears unsustainable.
When Alphabet CEO Sundar Pichai was asked about the billions that Google was spending on AI, he said that the “risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where it turns out that we are over-investing.”
This extreme capital expenditure’s reminiscent of the ‘build it or miss out’ phase of the early internet. In other words, FOMO (fear of missing out). But history says this spending won’t last forever.
For me, Nvidia’s clearly an incredible firm with a visionary leader, and I think it will ultimately sustain its lead in GPUs. But that doesn’t necessarily make it a good investment today at a $3trn market-cap.
I sold my shares this year. That might be premature in the short term but the right move over the long run.
