It has been an incredible few years for Nvidia (NASDAQ: NVDA). Over the past five years, Nvidia stock has soared by 1,217%.
That is the sort of return that many investors dream of – but only a few can achieve.
A lot of people, including myself, missed out on the soaring Nvidia stock price.
But all is not lost – I think analysing why it has done as well as it has can help as I scour the market for possible growth stock stars of the future.
1. Investors love a consistent story
While some companies have promising technology, the path to commercialising it can be both slow and inconsistent. I think there are a few UK renewable energy shares that illustrate this point painfully well.
When people invest in what they see as an exciting growth story, they like to see growth. Many also like to see consistency.
Something Nvidia has done brilliantly is to keep meeting or surpassing investors’ expectations, quarter after quarter and year after year.
The company has been delivering the goods, not excuses, about why sales are going slower than expected, or why technology development is not as fast as it hoped.
One mistake I think a lot of investors make when evaluating tech stocks is falling in love with a technology. But to do well over the long term, a company typically needs not just the technology but also the commercial skill to bring it to market and make money from it.
Showing the investment community that a company is getting bigger and more profitable, rather than hitting repeated bumps in the road, helps explain why some tech stocks do well – including Nvidia.
2. Show me the money!
Of course, just being consistent is not enough (though it helps). Ultimately, even patient tech investors want to know that a business will be able to generate sizeable profits.
One way to do that is by actually generating profits. Indeed, Nvidia’s soaring stock price partly reflects its massive profitability.
But even if a company is still spilling red ink, the investment case is usually stronger if it can at least demonstrate a credible path to profits. That involves everything from targeting a sufficiently large user market to having the right level of pricing power.
Nvidia’s market was large even before the AI boom expanded chip demand significantly. It also has pricing power, thanks to its proprietary designs.
If the chip market stays large, that could mean Nvidia’s profit keeps growing over time. That might see Nvidia stock move higher still from where it stands today.
3. Never forget fundamentals
Despite that, for now I have no plans to add Nvidia to my portfolio.
Although I think it is a great business, its share price looks too high to me when considering risks like a potential slowdown in demand after the initial AI installation boom and the potential for export controls to hurt sales in some markets.
When a tech stock is on fire for years at a time, it can be tempting to buy it based on momentum. But I see that as speculation, not investment.
No matter how well a stock like Nvidia is doing, I always consider whether the current price seems like offering good value for the business’s prospects.
