Here are 3 ways to think about Nvidia stock
I continue to weigh my options when it comes to investing. I would be happy to own Nvidia stock in my portfolio — but I am not willing to pay the current price.
In making my decisions, I have been trying to think about the share from different perspectives. Here are three of them.
Like Amazon before the dotcom crash
Artificial intelligence (AI) has some signs of being a stock market bubble. If that bubble bursts, for example because computing power progress means future chip demand is much less than expected, it would likely have a big impact on Nvidia.
That helps explain why I am nervous about buying at the current Nvidia stock price. If it falls down I would then be nursing a paper loss, perhaps a sizeable one.
Then again, Amazon fell 94% between the dotcom boom of November 1999 and September 2001. Still, since then it has gone up 76,600%. As a long-term investor, I do not mind sitting on a paper loss (even a sizeable one) if I continue to believe in the long-term investment case for a share.
But while Amazon in 1999 could be an interesting comparison for Nvidia stock today, there is no guarantee latter would bounce back the way the former did.
Amazon's market grew significantly. The market for AI chips may keep growing fast – but it could also be that after initial installations are complete, demand falls.
A bubble waiting to burst?
That leads me onto another potential way to view Nvidia stock: as a massive bubble waiting to burst. After all, the price-to-earnings (P/E) ratio is 56. That is higher than I would be willing to pay, though large tech stocks often do command high P/E ratios.
But earnings have exploded at Nvidia in recent years. Last year's basic earnings per share of $2.97 were far more than double the prior year's $1.21 – and around 25 times higher than just five years previously. If the surging demand for AI chips turns out to be a blip rather than a long-term trend, Nvidia's eanings could come crashing back to earth.
In such a scenario, even if Nvidia remained solidly profitable, its stock price may move far below where it currently stands. This is the risk that most puts me off investing at the current share price.
Success story set to grow
A third scenario could be that Nvidia might be like Microsoft or Apple at multiple points in their history – massively successful yet set to grow further, boosting an already costly-looking share price.
Apple stock is up 131% in the past five years. But five years ago, Apple was already massively successful and one of the biggest companies on the market.
Nvidia's proprietary technology, large customer base and proven business model have brought it a long way in a few years. Maybe it can do the same again over the next few years.
The post Here are 3 ways to think about Nvidia stock appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Apple, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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