Nvidia (NASDAQ: NVDA) stock is up 2,712% in five years, 31,141% in 10 years, and a jaw-dropping 366,732% since IPO in 1999. This demonstrates how enriching long-term stock investing can be.
It also shows how the chips — no pun intended — are stacked in favour of Foolish investors. I can only ever lose 100% of my investment on a stock (as long as I’m not buying on margin), but the potential gains are theoretically uncapped.
One figure that really bends my mind is that Nvidia’s market cap has increased by a staggering $3.2trn in just two years. To be clear, that’s trillions!
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Nvidia is now a hair’s breadth away from overtaking Apple again to become the world’s most valuable company. This makes me wonder whether it’d be utter madness for me to buy the stock today.
The bull case
Nvidia is the undisputed leader in artificial intelligence (AI) chips. But whether its profits continue to grow like wildfire rests on the extraordinary capital expenditure of large cloud service providers. The main ones are Amazon Web Services (AWS), Microsoft Azure, and Alphabet‘s Google Cloud.
Other tech firms forking out for Nvidia’s chips include Meta Platforms (for its Llama open-source large-language models) and Tesla (for its self-driving and humanoid robot initiatives).
The great news for Nvidia investors is that AI-related spending is showing no sign of slowing down. Here’s a selection of recent quotes to get Nvidia bulls stampeding.
- Taiwan Semiconductor (TSMC) CEO C.C. Wei: “We continue to observe extremely robust AI-related demand from our customers throughout the second half of 2024.” TSMC makes Nvidia’s AI chips.
- Meta CEO Mark Zuckerberg: “It’s hard to predict how [AI] will trend multiple generations out into the future…But at this point, I’d rather risk building capacity before it’s needed rather than too late.”
- Nvidia CEO Jensen Huang: “Demand for Blackwell [Nvidia’s newest AI chips] is insane…Everybody wants to have the most, and everybody wants to be first.”
The bear case
I’d say the biggest risk is an unexpected slowdown in AI spending, driven by disappointing returns on investment in the technology. AI might disrupt many areas, but it won’t change the fundamental reality of business (companies need to make profits on their investments to deliver value for shareholders).
A slowdown would disproportionately impact Nvidia because the bulk of its sales are coming from a small handful of companies. The firm’s four largest customers now comprise over 40% of revenues.
This risk is heightened because of the stock’s sky-high price-to-sales (P/S) ratio of 37.
Pound cost averaging
I don’t think it would be utter madness for me to invest in Nvidia today, assuming I was taking a long enough view. But I’d do so cautiously given the high valuation. Even the world’s best companies can make for poor investments if bought at the wrong price.
Impulsive behaviour, particularly FOMO (fear of missing out), is an investor’s worst enemy. As Warren Buffett has said, “The stock market is a device for transferring money from the impatient to the patient.”
Nvidia is a volatile stock that can drop 50%+ in a few months. So, if I wanted to invest, I’d consider a pound-cost averaging strategy.
That is, I wouldn’t invest a one-off lump sum. Instead, I’d use pullbacks in the share price to build out my position over time.
