Could Nvidia (NASDAQ: NVDA) be the gift that keeps on giving? Last year, Nvidia stock was already on fire – but since then it has moved even higher.
Since the first trading day after Christmas last year, Nvidia has moved up by 29%. So, ignoring currency fluctuations, £5,000 invested back then would now be worth around £6,450.
Longer term, the stock has performed brilliantly. In five years, it is up by 1,293%.
So a £5,000 investment just five years ago would now be worth just a few hundred pounds short of £70,000 (before taking currency movements into account). Wow!
Small dividend – but will it stay that way?
Nvidia does also pay a dividend, but the yield of 0.02% is hardly the stuff of investor dreams.
Still, someone who invested £5,000 a year ago would at least have received a bit more than £1 in dividends over 12 months.
This may seem irrelevant. But Nvidia is massively profitable right now, so I think there could be potential for strong dividend growth in years to come.
That yield might look paltry, yet over the long term, small but fast-growing dividends can start to add up to something more substantial.
Could this still be a cracker?
Over the past year, Nvidia stock has soared partly because there is a lot of investor excitement about AI – and the firm’s chips are central to it.
But that 29% growth in the stock price has been about more than just hype. Nvidia’s business – already in strong growth mode and solidly profitable a year ago – has been growing by leaps and bounds.
In the third quarter, Nvidia’s revenues grew 62% year on year to $57bn. Net income grew slightly faster, moving up 65% from the prior year period to $31bn.
As those numbers show, Nvidia is not some unproven wannabe riding on the hype of AI. It is a huge business already making money at a mind-boggling rate.
That financial success in turn points to some of Nvidia’s strengths. It has lots of cutting-edge proprietary intellectual property, an impressive sales operation and deep relationships with some very big customers.
On that basis, I reckon the firm could potentially keep growing at a rate of knots. If it does so, that may propel the stock price even higher in 2026.
Staying grounded as an investor
For now though, the company’s valuation is simply too rich for me to invest.
Its earnings are huge – but so is its $4.4trn market capitalisation. That means Nvidia’s stock sells at a price-to-earnings ratio of 45.
That may not sound outrageous compared to some tech companies. But my benchmark is not other tech firms: it is what I think represents a price with long-term value creation potential for me as an investor.
To my mind, the current price does not sufficiently account for risks like a slowdown in spending on AI chips after the hugely costly initial rollout we have seen over the past several years.
There is also an obsolescence risk. What if a competitor develops chips that deliver many of the same benefits as Nvidia’s, but at a fraction of the cost?
At the right price I would happily invest in Nvidia – but for now the stock looks too costly for my tastes.
