Had you heard of Nvidia (NASDAQ: NVDA) back in 2021? I had, and eyed up Nvidia stock, but did not buy any,
Boy did I miss out!
Better than a 10-bagger!
Over the past five years alone, the Nvidia stock price has soared 1,171%.
That is enough to have turned a £20,000 investment back in February 2021 into a shareholding worth around £254,200 today.
In other words, a £20,000 investment five years ago would now be worth over a cool quarter of a million pounds!
Long-term value creation
Is that exceptional?
Nvidia stock was selling for less than a dollar apiece a decade ago. But this is no overnight success story.
The recent surging stock price reflects a business built over decades. Since listing on the stock market in 1999, Nvidia shares have gone up by a staggering 473,750%! Wow.
Of course, past performance is not necessarily an indication of how a company may do in future.
As I see it, there are a couple of key schools of thought when it comes to Nvidia stock.
On one hand, bears are worried that the massive AI spending we are seeing at the moment is basically a one-off. Once it ends, sales and profits could slump at Nvidia, sending the stock price down.
Bulls, on the other hand, point to Nvidia’s strong business even before AI and hope that, anyway, AI demand will stay strong. Nvidia’s deep client relationships and proprietary technology give it pricing power.
This is not some loss-making startup but a proven, massively profitable business that even pays a dividend.
Okay, the yield is a paltry 0.02%. But that still means someone who spent £20,000 on Nvidia stock at its lower price five years ago would be earning around £50 a year in dividends.
Should I buy?
Incidentally, to keep things simple, I have presumed a flat exchange rate between pounds and Nvidia’s listing currency of US dollars over the past five years.
In reality, exchange rates can move around. That can help boost returns, or eat into them, depending on how the rates move.
But the currency risk does not put me off investing in Nvidia stock. What does put me off is a straightforward case of valuation.
I basically buy into the thrust of the bull case I laid out above. I see Nvidia as a proven business with strong competitive advantages and reckon that its stock price could move even higher if things keep going well.
But as an investor I always try to build in a margin of safety when investing.
While I see merit in the bull case for Nvidia, I also recognise that some of the risks I mentioned above are real.
If they materialise they could hurt the stock price. At 47 times earnings, the world’s most valuable listed company by market capitalisation has a long way it could fall.
So, for now, I will not be investing.
