In the last few years, some of the most exceptional stock market returns have come from US tech companies. The latest big winner is Nvidia (NASDAQ: NVDA) stock. The California-based chipmaker has had a truly outrageous three years.
730% returns
Let’s say I invested £1,000 into Nvidia stock three years ago. How would I have got on?
Well, if I’d invested in June 2020, my stock would have risen 366%. So my £1,000 stake would have increased to £4,660. And if I’d bought the Covid dip in March 2020, I’d have seen a 730% increase. That would have meant my £1,000 stake increasing to £8,300.
These returns look even crazier in context. The S&P 500 is up 40% in the last three years and the FTSE 100 is up only 23%. Even if we only look at the US tech sector, that’s up only 47%. Simply, Nvidia has been on an absolute tear.
Sadly, I missed out on the gains here. And as I don’t have access to a time machine, the important issue for me now is whether this stock is still a buy today.
What happened?
While the last three years have been terrific, it’s not been all smooth sailing. Last October, Nvidia shares were down 65% in about a year as the tech sector struggled with rising interest rates.
Then, Chat-GPT was released and took the world by storm. The hype around AI became intense (almost unbearable if you ask me). And investors flocked to Nvidia, hoping to own shares in one of the key players of the ‘AI revolution’.
But this misses what I think is the real story here, which is the chipmaker’s enormous competitive advantage. Its $10,000 A1 chips were the best in their class. Now, they’re used for 95% of machine learning.
Sure, AI has been a huge catalyst for the firm. But without the economic moat of being the best chipmaker, none of these returns could have happened.
Is it a buy?
The long and short of it is that I like Nvidia stock. It’s a great company with great products. The only problem is that AI hype has driven up the price.
Now, it trades at 39 times forward earnings. Put another way, it will take 39 years of profits to make back the market cap. This means it’s an expensive buy, and that adds risk. Compare it to the S&P 500 average of 22, or even other tech firms like Apple (31) or Alphabet (27).
Another problem I have is that expected earnings seem optimistic. The company projects $11bn next quarter after $7bn for the quarter just gone. A miss here and the price will seem even dearer.
For Nvidia to be a buy I’d need to see a better entry point. Perhaps the hype around AI will die down soon? If so, I’d consider picking up some shares. As it is, I’ll be keeping my powder dry for now.
