Companies as popular as Nvidia stock (NASDAQ:NVDA) often have too much hype associated with them, in my opinion. To me, that often spells trouble.
Overinflated share prices mean more risk of downside volatility when the market readjusts to the fundamentals.
It’s one of the reasons I only own the company at around 2.5% of my total portfolio.
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However, I think no one is better than Nvidia at what it does.
Nvidia: the graphics processing unit king
The company’s speciality is in graphics processing units (GPU) for professional and gaming use. It also is a leader in AI, autonomous tech and data centre computing.
Nvidia has around 85% share of the GPU market as of 2023, making it dominant. Nvidia’s financial year 2023 also saw a 40% rise in research and development costs, making it battle-ready for future technology advancements.
Nvidia has a hand in making advanced capabilities possible in many of the world’s most popular products. For example, the Nintendo Switch gaming console, the Nexus 7 Google tablet and the “Drive Concierge” autonomous driving mode used by Mercedes and Volvo.
Everybody wants to own a piece
For share prices to rise, people have to buy more of them. There are a few key reasons why the fundamentals have warranted a buying spree recently.
The third quarter of Nvidia’s financial year 2024 saw a range of strong financials compared to the third quarter of its financial year 2023. There was a 206% revenue increase for the company, which deterred rival funding. Additionally, gaming revenue increased by 84%. Furthermore, revenue from computing and networking products increased by 248%.
However, with a price-to-earnings (P/E) ratio of around 115, arguably people are expecting too much from the company. That P/E ratio is in the bottom 10% of 600 companies in the semiconductor space.
The shares could go either way from here
Right now I believe the company will keep on growing, despite a 294% rise since 30 September 2022.
However, I can see if the share price growth gets unstable and rises disproportionately to revenue growth, we could see a bubble form.
Over time, if investors keep piling into Nvidia stock, a correction in the price could bring the shares down to a more reasonable, or even undervalued level. That’s when I’ll be looking to buy most of my shares in the company.
The company could meet stiff competition in the near term. Rival businesses like AMD and Intel could make significant strides that reduce Nvidia’s market share.
Also, Nvidia is highly dependent on Taiwan’s TSMC for GPU and semiconductor production. If the US and China relations over Taiwan worsen, the tech industry at large might face a disproportionate nosedive.
I’m staying put
For now, I quite like my 2.5% portfolio allocation for Nvidia. It gives me exposure to one of the most exciting growth companies in the technology space, without making me too vulnerable to the inherent risks.
As Warren Buffett says: “Be greedy when others are fearful and fearful when others are greedy”. Right now, people are definitely being greedy with Nvidia shares.
