Nvidia (NASDAQ: NVDA) stock has been the standout winner of the artificial intelligence (AI) boom. It’s up around 700% since the release of ChatGPT just over two years ago!
But the AI stock has been doing the business over shorter timeframes too. Any investor who’d put five grand into Nvidia just three months ago would be sitting on a 25% gain.
In other words, their £5,000 stake would now be worth around £6,250 — a market-thrashing return.
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The question for me now is whether I should reinvest in the stock after selling it earlier this year. Here are my thoughts.
Exponential growth rates
According to Benjamin Graham, Warren Buffett’s mentor and the father of value investing, a growth firm/stock is one which doubles earnings per share every 10 years. That’s a compound annual growth rate (CAGR) of roughly 7.2%.
In fiscal 2015 (FY15), Nvidia’s revenue was $4.7bn, with net profit of $630m. For FY25, the firm is expected to post revenue of $129bn and net profit of about $73bn.
Now, I haven’t used earnings on a per share basis here. Needless to say though, we’re not looking at a steady doubling over 10 years. In fact, the net profit CAGR is more like 61%!
Of course, Graham was writing in the 1930/40s, before semiconductors lay the foundations for the digital world and lower marginal costs of scaling. But the differences are stark.
Mind-boggling market cap gains
At the start of the 20th century, U.S. Steel became the first company to reach a $1bn valuation. In 1955, General Motors surpassed a $10bn market cap.
It took another three decades for IBM to break through the $100bn barrier. Then Apple became the first publicly traded company to achieve a $1trn valuation around 30 years later.
Nvidia? It’s added more than $3trn in market value in two years!
The lesson here is that transformative technologies like AI can enable growth rates that were utterly unimaginable in the past.
Insane demand
As things stand, AI spending continues to go through the roof, as next-generation AI models need more and more computing power on which to be trained.
Nvidia CEO Jensen Huang said current demand for its chips is “insane“. Clearly, this bodes well for its upcoming quarters.
Some see future capital expenditure on AI infrastructure heading into the trillions. Meanwhile, nuclear power is even being touted to support the incredible future electricity demands of the technology.
Should I buy Nvidia shares?
Personally, I think the skyrocketing costs of training AI systems will end up mattering to huge tech firms.
If the return on investment from these enormous expenditures disappoints or doesn’t materialise, there may be a massive rethink on AI spending, impacting Nvidia’s growth significantly.
Moreover, Nvidia finds itself in a strange position. Its key cloud platform customers are all aggressively developing their own AI chips to help break their reliance on its own GPUs and associated software.
Something about this dynamic just doesn’t sit right with me. Nvidia might eventually prove too successful for its own good.
Admittedly, we’re not there yet, as it remains the leading arms dealer in today’s relentless battle for AI supremacy. Yet this uncertainty prevents me from rebuying the stock to hold for the next five years.
