Over the past year, the value of Nvidia (NASDAQ: NVDA) has increased by over half. That is the sort of return many investors (myself included) would be happy with.
It has done even better over the long run, though. Here is a trio of lessons I think all investors could use when looking for potentially brilliant growth stocks.
The long-term approach can pay off
I mentioned that while Nvidia’s performance over the past year has been outstanding, it actually pales beside a longer-term perspective.
Over the past five years, Nvidia stock has grown by 1,346%.
But since listing in 1999, it has gone up a staggering 472,250%. In other words (and excluding exchange rate movements), £1,000 invested back then would now be worth over £4.7m!
Not only that, but that figure excludes dividends.
Who cares, you may ask: the current dividend yield is a paltry 0.02%. That is true, but someone investing back in 1999 when Nvidia listed would be earning a yield of around 95% today thanks to the far lower price back then.
I am a big believer in long-term investing. Nvidia stock demonstrates why.
A brilliant business can make a good medium-term investment (depending on the purchase price). But it can make an even better long-term one if an investor buys at the right time.
Profitability matters
One of the things about the tech boom of recent years (and the dotcom boom before it) that has needled me as an investor is the idea that a company should focus on revenues not profits as it grows.
I understand the argument: sell enough products or services to build market share and hopefully profits will follow. Also, some businesses require sizeable expenditure to build scale before they can get any payback on that expenditure.
That second point is true of Nvidia, in fact. The research and development (R&D) involved in designing its proprietary chips is substantial. Last year, Nvidia’s R&D budget was close to $13bn.
But from day one, Nvidia had a well thought-out business model. It has also focused on products that, thanks to their benefit for the customer and unique features, can command a pricing premium. That is good for profits.
I think how seriously a company takes its pathway to profit (if it does not make a profit from day one) can say a lot about how credible its management is.
Big share of a big market
Is it better to have a niche market share in a large market, or a large market share in a niche market?
While pondering that question, think about what has propelled Nvidia stock to its current heights.
Its massive revenues and profits reflect the fact that it operates in a big market – and enjoys a high market share.
Operating in small markets can be very profitable, but there are limits to how much sales volumes can grow over the long term.
Nvidia, by contrast, has been able to reach for the sky by focusing on a huge end market – and building a large market share.
