In a solid but unspectacular year for stocks, it’s hard to ignore what NVIDA has done. While the S&P has gained in the 11% range for the year to date, NVIDIA’s price has soared about 450%. You might be kicking yourself for not putting every penny you had into NVIDIA five years ago when its price was well under $100 a share (compared with nearly $450 in early October), but the truth is that of the thousands of stocks available, there will always be a few high-flyers you didn’t spot.
NVIDIA’s been growing at a high clip for a while now. The company makes graphics processing units, or GPUs. These boring-sounding products actually do exciting things – they’re the muscle behind the tremendous images you see in video games. More recently, the company has been a prime beneficiary of the explosion in artificial intelligence.
The company’s average annual sales growth for the past decade has been about 25%, and earnings growth has been around 35% a year. For a company with annual total revenues exceeding $27 billion, these are astonishing growth rates. NVIDIA’s stock price also has advanced pretty consistently over the years, and the rise of AI mainly drove the price to explode.
There are three lessons here about NVIDIA. First, many investors probably think they’re too late for the party, but this is a common fallacy in investing. What investors paid for the stock yesterday has little to do with what they’ll pay for it tomorrow. Just because the price has risen dramatically over the past year doesn’t mean it can’t rise just as dramatically over the next year. So do your own research to determine what a good entry point for this stock is.
Second, valuation always matters. The price-earnings ratio in early October, based on earnings per share over the previous four quarters, was 108. That’s extremely high, and history has been unkind to stocks with high P/Es. Analysts are expecting the company to grow nearly 80% a year over the next five years. Even if you agree that the company can grow that fast, at its current valuation, NVIDIA seems to be “priced for perfection.” That is, priced assuming that nothing goes wrong in meeting that 80% mark.
I’m always queasy paying that much for a stock. I’ve found that stocks priced that high are racing downhill on roller skates. All it takes is a small pebble in the way to cause them to fly off-course. We’ve seen the story play out repeatedly, where a high-P/E stock misses earnings estimates and sees its price crash to earth.
Third, if you find a stock is too expensive, be patient. In NVDIA’s case, between 2017 and 2021, for example, there were opportunities to buy at a more reasonable price where the P/E was 30 or less. Of course, you’ll want to know why the company is selling at a more reasonable price and determine whether it’s a short-term or long-term issue.
So don’t write off a stock just because you missed an opportunity. There’s still a chance it might be a sensible addition to your portfolio someday.
Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax-affiliated insurance agency. 6260 Lake Osprey Drive, Lakewood Ranch, FL 34240.
