Ever had the experience of missing out on something? Looking at the growth of Nvidia (NASDAQ: NVDA) I am sure a lot of us have had the sense of a missed opportunity. Nvidia shares have soared in recent years.
Stellar value creation
In fact, over the past five years, the shares have moved up in value by 1,306%.
So, excluding currency movements, someone who invested £5,000 in Nvidia in January 2021 would now be sitting on a shareholding worth over £70,000. Wow!
For simplicity I exclude currency movements but there has been some volatility in the exchange rate of the pound and dollar in the past few years, Currency movements can work for or against someone depending on what way exchange rates move. They are always a risk to consider when investing in overseas shares denominated in a foreign currency.
Dividend growth potential
As for dividends, the capital gain on Nvidia shares in the past five years has been so good that it seems almost greedy to think about them. But in fact, Nvidia does pay dividends.
With its 0.02% yield, the shareholder payout may seem nothing to get excited about. But bear in mind that someone who invested at a much lower price five years ago would now be earning a dividend yield of around 0.3%.That would come out to around £14 a year from the £5,000 investment.
On top of that, given Nvidia’s strong earnings growth, I think the dividend could get much larger in years to come.
The most recent quarterly dividend was just one cent per share. But diluted earnings per share were well over 100 times greater than that, at $1.30.
That underlines the scope for future dividend growth, if the company decides to spend more spare money on shareholder payouts rather than investing it in growth.
For now though, growth seems to be the focus, so while a higher dividend is affordable there is no guarantee it will happen. Indeed, no dividend is ever guaranteed.
Strong business model
I have looked at the idea of buying Nvidia shares on multiple occasions over the years.
My thought process has always been that I like the company, but not the share price.
I like the business because it is operating in a massive and fast-growing economic space that has high profit margins. Thanks to its expertise and proprietary technology, it has few if any rivals for many of its sales.
That in turn has helped it develop a large installed user base and deep customer relationships, which I think makes the investment case even stronger.
Appealing business model, but the price…
What about the share price, though?
That is where I still have a concern. Nvidia shares sell for 46 times earnings. That comes on the back of very strong earnings growth.
Can earnings stay at their current level, let alone grow? There are lots of reasons they may, like the ones I just outlined.
But growing AI demand is not guaranteed to last. If it does not, that could hurt sales volumes and profits for Nvidia. If demand does last, that could encourage more competitors, potentially pushing down profitability in the chip industry.
So, at the current price, I will not be buying any Nvidia shares for my portfolio.
