I have a confession: I don’t own Nvidia (LSE: NVDA) shares. In my defence, I’m British.
I hold plenty of FTSE 100 stocks directly, but only invest in the US via trackers. That’s one reason why I don’t hold Nvidia, but there’s another more important one.
When the AI chipmaker’s bandwagon started rolling last summer – I mean, really rolling – I decided I’d already missed my chance. The Nvidia share price had been going gangbusters and I thought: it can’t go on like that.
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It’s my typical response to red-hot momentum stocks. I’m scared of hopping on board just as the wheels come off. As a result, I’ve missed out on a lot of excitement from Nvidia, Tesla, Amazon and the like.
I need to stop worrying and buy growth stocks
It’s time to rethink my attitude to growth stocks. But I still keep banging my head against the wall with the same question, only more so. Have I left it too late?
Nvidia shares are up 165% over the past year. Over five years, they’ve soared 2,195%. The company has a market cap of $3.3trn. It can’t keep growing at the same rate, it would swallow the entire global economy.
Then there’s its valuation. The shares now have a price-to-earnings ratio of 55.1. That’s very expensive.
By comparison, the S&P 500’s P/E is around 33 times (and most investors think that’s pricey). Yet Nvidia’s earnings continue to soar. They jumped 94% year on year in Q3 to $35.1bn. Suddenly, Nvidia doesn’t look so expensive. Its forward P/E is just 30 times earnings.
A big attraction is that Nvidia isn’t pouring huge sums into building AI infrastructure. It leaves that to others. It doesn’t even manufacture its high-performance graphics processing units (GPUs). That’s outsourced to third-parties like the Taiwan Semiconductor Manufacturing Company and Samsung.
I’m late to the party but will go anyway
This makes it a capital-light business. On the other hand, it brings geopolitical risk. What happens if China invades Taiwan? Plus there are potential supply chain issues, if these manufacturers are unable to keep up with demand. US President-elect Donald Trump’s mooted trade tariffs could also cause disruption.
Nvidia also has to keep innovating to maintain its leadership in GPU and AI chip technology. Plus there’s the underlying risk AI hype has been overdone.
The shares slumped more than 6% on Tuesday (7 January) amid a wider tech sell-off triggered by surging US government bond yields. That wiped out $220bn off its market value. I’m struggling to get my head round that sum. So is this my buying opportunity?
The 50 analysts offering one-year Nvidia share price forecasts have produced a median target of $174.6. If correct, that’s an increase of around 24% from today. That’s pretty good, but also shows how growth expectations are slowing.
I’ve clearly left it pathetically late to buy Nvidia. Better late than never though. I could hang around for another dip, but who knows if we will get one? So I’ll play safe by investing a smaller sum and if the share price does retreat, I’ll buy more.
