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Nvidia (NASDAQ:NVDA) stock’s astronomic rise has been a sight to behold. The company’s now heralded as a member of the ‘magnificent seven’ — a group of leading tech stocks that have driven the S&P 500‘s returns this year.
So, how did the graphics processing units (GPUs) designer become one of the world’s most exciting growth stocks? And how much would I have today if I’d invested $1,000 back in 2013?
Let’s explore.
Market dominance
Nvidia’s core business model traditionally centred on designing chips to enhance the experience of computer gaming. However, in recent years, the company has expanded its horizons to tap into growth opportunities in the artificial intelligence and autonomous driving sectors.
Many analysts believe there’s a generative AI gold rush under way. Indeed, Sir Patrick Vallance, the UK’s former Chief Scientific Adviser, believes AI technology could be as transformative for jobs as the Industrial Revolution. Nvidia’s in an excellent position to capitalise on the rapidly evolving landscape.
Generative AI models require thousands of GPUs to operate successfully and Nvidia’s products are excellent at running deep learning algorithms. The company’s GPU market share is estimated to be around 80%–90%, so serious competition looks scarce for now.
10-year return
For long-term investors who had foresight as to what Nvidia would become, the return on investment has been nothing short of exceptional. Back in July 2013, I could have bought 281 Nvidia shares at $3.56 each for $1,000.36.
Today, my shareholding would be worth $133,458.14. I’d also have earned $1,258.88 in dividends over the 10-year timeframe. That’s a blistering 13,493% return.
This is a testament to the company’s success as well as a reminder of the potential returns available to savvy investors who can identify growth stocks of the future.
Stellar results
The soaring Nvidia share price is underpinned by strong recent financial results. In Q1 FY24, the company delivered a 19% revenue hike compared to the previous quarter, reaching $7.19bn.
In addition, the business posted record revenue for its data centre operations, of $4.28bn. The growth outlook shows few signs of slowing. The company’s targeting $11bn in revenue for Q2 and announced it’s “significantly increasing” supply of its data centre products to “meet surging demand“.
An expensive stock?
This might all sound like excellent news for potential investors. But, every rose has its thorn.
Nvidia stock trades at a price-to-earnings (P/E) ratio of 247.36. Compare that to the FTSE 100‘s 8.8 times multiple and it’s hard to escape the conclusion that the shares are expensive. There’s a significant risk that the stock is overvalued today.
Improving business fundamentals could potentially justify the lofty valuation. After all, if AI is as transformative as many believe, the company’s earnings could continue to accelerate.
However, it won’t all be plain sailing from here. The US government’s mulling tougher restrictions on AI chip exports to China, which could limit the company’s growth opportunities.
Plus, Beijing is ploughing resources into homegrown companies to rival Nvidia, potentially raising competition risks in what is fast-becoming an AI arms race.
What I’m doing
I bought Nvidia shares earlier this year. I’m sitting on a healthy return at present. The expensive valuation puts me off buying more for now, but I’ll happily continue to hold my existing shares.
