The key to life-changing returns in the stock market is long-term investing, and few companies embody this concept better. nvidia (NASDAQ: NVDA ). If you bought $1,000 worth of the chipmaker’s stock 10 years ago, you’d have about $267,000 today — a return of 26,600%.
That said, past returns don’t guarantee future results — especially in an incredibly speculative new industry. Let’s examine the pros and cons of Nvidia stock to determine whether the legendary technology giant still has long-term multibagger potential.
Nvidia’s core business has always been designing and selling Graphics processing unit (GPUs), a type of A computer chip capable of parallel processing (running multiple calculations simultaneously). This technology proved instrumental in introducing video game graphics, helping Nvidia dominate the custom PC and gaming laptop markets in the 2000s.
when Bitcoin Launched in 2009, GPUs found another use case in cryptocurrency mining, fueling Nvidia’s second boom cycle. At the time, many blockchains used GPU computing power to validate their networks and mint more coins in the process. Proof of work (PoW). This market declined significantly in 2022, wiping billions off Nvidia’s market cap.
Video gaming and crypto mining are hardware Both represented by Nvidia’s gaming segment, which posted third-quarter sales of just $3.3 billion or just About 9% of total sales. Generative artificial intelligence (AI) has become the company’s latest boom cycle, with its data center business representing 88% of total sales. The company is very much Vulnerable to non-diversity and a more rapid change in its fortunes.
In the next 10 years, Nvidia’s AI hardware business may face Threaten it Growth and profit. And it’s not hard to see why. With a gross margin of 75%, Nvidia is selling hardware at a software-level margin. For reference, Software-as-a-Service (mother-in-law) giant Microsoft Has a gross margin of just 69%, primarily selling digital products and services.
Nvidia’s market dominance will naturally encourage customers to switch to its products wherever possible. While Nvidia seems to be able to keep up with direct competition (from other AI chipmakers eg Advanced Micro Devices) at bay, it can’t stop “hyperscaler” customers the alphabet And Amazon From designing your own custom chips or holding on to your old Nvidia hardware instead of upgrading to the latest models every year.
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Nvidia’s sky-high margins may also come under increasing pressure from suppliers Taiwan SemiconductorWhich helps it build the highest AI chips. In June, analysts at Morgan Stanley reported that Fab was considering raising production fees for Nvidia. And if that’s true, it could eventually eat into the company’s margins.
To be fair, though, Nvidia’s third-quarter operating income rose 174% to $18.6 billion. And its forward price-to-earnings (P/E) ratio of just 33 seems quite low compared to this growth rate, suggesting that the expected slowdown in earnings growth may already be partially priced in.
Generally, timing the market is better than timing the market. And even if you bought Nvidia stock at the peak of its previous boom cycles, you’d still come out ahead if you held the shares long. He said, well A market cap At $3.5 trillion, Nvidia has become the second largest company in the world. So, things may be different now.
Newton’s second law of motion states that the larger an object is, the more force is required to move it. And while 18th century physicists did not have financial markets in mind, this assumption may be true for stocks. Investors who buy Nvidia are now making some very optimistic assumptions about the future of the AI industry. And this It may make more sense to wait until the hype dies down before buying shares.
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John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Will Ebifung No positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Bitcoin, Nvidia, and Taiwan Semiconductor Manufacturing. Motley Fool has a Disclosure Policy.
