Tomorrow (19 November) all eyes will be on Nvidia (NASDAQ: NVDA) as the chip giant announces its latest quarterly earnings. Well, I say “all eyes” but in fairness, lots of investors do not care less about the Nvidia stock price.
That could be a mistake, in my opinion.
Nvidia’s earnings: not just about Nvidia!
On one hand, Nvidia clearly matters economically.
This year it became the first listed company in history to command a market capitalisation of $5trn, although that figure has since fallen back to $4.4trn. Even so, it remains the world’s largest listed company by market capitalisation.
But that alone is not why I think the Nvidia stock price potentially has importance for all investors.
Instead, I think Nvidia is systemically important because it is a proxy for the hopes pinned on AI-fuelled growth in recent years.
As Alphabet’s chief executive told the BBC this week, if the AI bubble bursts, he reckons “no company is going to be immune”.
Here’s why Nvidia matters
On one hand, it is clear why Nvidia is a proxy for the AI boom.
Its pricey, specialist chips have been sold in droves as companies including Alphabet scale up their AI expenditure massively. Any significant shift in sales volumes could help signal whether that phase is starting to wind down, or accelerating.
But I think there is more to it than that. Nvidia is not the only chip company. It is also not the only firm that has seen business soar directly due to AI-related expenditure.
However, as well as its massive size (or perhaps because of it), Nvidia has symbolic importance.
The stunning rise of Nvidia has been an integral part of the AI-fuelled tech stock boom in recent years. If Nvidia stock tumbles at some point, I fear the wider sector would also potentially fall.
If investor sentiment soured enough, that could potentially trigger volatility across the whole stock market.
I’m doing nothing, for now
I like Nvidia’s business. It has proprietary technology, an installed client base with deep pockets, and is massively profitable.
At the current price, though, the Nvidia stock price is too high for my tastes. I do not think it offers me the sort of margin of safety I like, given risks such as a slowdown in AI-related chip expenditure.
Could it fall a long way from here? Potentially yes – although if tomorrow’s results are strong like they have been in recent quarters, maybe it can rise higher still.
But looking back a quarter of a century to the dotcom boom, companies such as Amazon saw their stock prices collapse – only then to rise spectacularly in the following decades. As a long-term investor, that grabs my attention.
Nvidia is a great company and I would happily own it if I could buy the stock at what I see as an attractive price.
For now, I am sitting on my hands. But if it tumbles, potentially triggering a wider market sell-off, I will happily take another look.
