Oh, to have bought into chip giant Nvidia (NASDAQ: NVDA) five years ago. Since then, the Nvidia share price has soared 1,265%. That is the sort of stock market return that many investors dream of.
I have missed out on owning Nvidia shares. But I have still profited in some way from the soaring price, by drawing a handful of lessons I believe can hopefully be of broader use in the stock market.
Macro trends can be broken down into specific elements
Why has the Nvidia share price soared?
The short answer is: AI. But that is indeed a short answer. Many other firms that have tried to ride the AI wave have done far less well.
High-level trends – sometimes called ‘macro’ trends – can be useful inspiration for investors. But it typically pays to break them down into ‘micro’ elements.
Take AI as an example: by asking what computing power was going to deliver AI, Nvidia could come onto an investor’s radar in a way that might not happen if just thinking at a high level about ‘AI’.
Value chains matter
Not all chip companies stand to do equally well from AI, let alone all companies that are in an AI gold rush.
One reason Nvidia’s share price has soared is because the firm’s profits have ballooned. That is partly due to where Nvidia stands in AI’s value chain.
A value chain is a simple but powerful concept. When you buy Dove soap at J Sainsbury, lots of companies may profit – from Dove-maker Unilever and retailer Sainsbury to the logistics company that delivered it and the packaging company that sells Unilever boxes for packing soap bars.
Those different companies earn different profit margins because they are in different parts of the value chain.
Chip designer Nvidia’s intellectual property and asset-light model have placed it in a very profitable part of the chip value chain compared to chip manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC).
While Nvidia stock has soared 1,265% in five years, TSMC has moved up 238%. Still a great performance – but far less than Nvidia!
Management matters, but can change
One risk I see for the Nvidia share price is key man risk. Its chief executive has been critical in the company’s vision and growth.
Great management is always welcome from an investor’s perspective. But it is important not just to value a company based on current management, because that can change (sometimes unexpectedly).
To quote Warren Buffett, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will”.
Competitive advantages are powerful
Nvidia is not the only chip company. But it has a lot of proprietary chip designs.
Like any good competitive advantage, that helps give it pricing power that can feed into profitability.
Investors often talk about competitive advantage. Nvidia shows what it can achieve in practice.
Look forward, not backwards
Investing can be full of ‘what ifs’.
But focussing on how brilliantly Nvidia stock has done historically may distract me from looking for shares I think are set to do well in the coming five years (and beyond).
There are lessons to be learned. As an investor, though, it makes more sense to focus on finding opportunities today than dwelling on missed opportunities of the past!
