Long-term investing is the key to life-changing returns in the stock market, and few companies emphasize this concept more. Nvidia (NASDAQ:NVDA). If you bought $1,000 worth of this chipmaker’s stock 10 years ago, your current profit would be approximately $267,000, or a rate of return of 26,600%.
That being said, past returns are no guarantee of future results, especially in an incredibly speculative new industry. Let’s take a look at the pros and cons of Nvidia stock to determine whether the legendary tech giant still has long-term multibagger potential.
History of boom and bust cycles
Nvidia’s core business has always been design and sales. graphics processing unit (GPU), type of A computer chip that is capable of parallel processing (performing multiple calculations at the same time). The technology proved essential for rendering video game graphics and helped Nvidia dominate the custom PC and gaming laptop market in the 2000s.
When Bitcoin was launched in 2009, GPUs found another use case in cryptocurrency mining, leading to Nvidia’s second boom cycle. At the time, many blockchains used GPU computing power to validate the network and mint more coins in a process called . proof of work (POW). This market declined significantly in 2022, wiping billions of dollars from Nvidia’s market cap.
Video game and cryptocurrency mining hardware both Represented by Nvidia’s gaming division, it generated just $3.3 billion in revenue in the third quarter. just Approximately 9% of total sales. Generative artificial intelligence (AI) has been the company’s latest boom cycle, with its data center business rapidly growing to account for 88% of total revenue. The company is very It lacks diversity and is vulnerable to further rapid changes in fortunes.
How will the story of generative AI end?
Nvidia’s AI hardware business could face challenges over the next decade threat to it Growth and profitability. It’s not difficult to understand why. With a gross profit margin of 75%, Nvidia sells hardware at software-level profit margins. For context, Software as a Service (SaaS) Giant microsoft has a gross profit margin of just 69% and primarily sells digital products and services.
Nvidia’s market dominance will naturally encourage customers to replace Nvidia products wherever possible. Nvidia (e.g. advanced micro device) will not stop “hyperscaler” clients like Alphabet and Amazon You can design your own custom chip or simply keep using older Nvidia hardware instead of upgrading to the latest model every year.
Nvidia’s extremely high profit margins may also increase pressure from suppliers, including: taiwan semiconductorcontributing to the production of top-of-the-line AI chips. In June, Morgan Stanley analysts reported that the factory was considering raising production fees to Nvidia. And if true, it could ultimately eat into the company’s profits.
But to be fair, Nvidia’s third-quarter operating profit increased 174% to $18.6 billion. Also, the company’s forward price-to-earnings (P/E) ratio of just 33 times looks quite low compared to this growth rate, and the potential for slower earnings growth may already be partially priced in. suggests.
Is Nvidia stock a buy?
Time in the market is generally better than timing the market. And even if you bought Nvidia stock at the peak of a previous boom cycle, you could still have come out ahead if you held the stock long enough. Having said that, Market capitalization 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, the more force is required to move it. and in between Although 18th century physicists probably didn’t have financial markets in mind, this concept also applies to stocks. Investors who are currently buying Nvidia are making very optimistic assumptions about the future of the AI industry. and that It may make more sense to wait until the hype dies down before buying the stock.
Should you invest $1,000 in Nvidia right now?
Before buying Nvidia stock, consider the following:
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Consider when Nvidia created this list on April 15, 2005… If you invested $1,000 at the time of recommendation, you would have earned $841,692.!*
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Will Ebifang has no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Bitcoin, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.