The NASDAQ has logged a solid 80% gain over the past five years. However, two standout stocks crushed that return by more than tripling over the same period. I'm not talking about small, under the radar players -- I'm talking about large cap chipmaker Nvidia (NASDAQ:NVDA) and mega cap internet retailer Amazon (NASDAQ:AMZN).
Nvidia's future looked murky back in 2011. The chipmaker was losing market share to AMD (NASDAQ:AMD) in GPUs, and its attempts to regain lost ground through price cuts hurt margins. It diversified into mobile baseband chips by acquiring Icera that year, but many analysts questioned its ability to compete against market leader Qualcomm. After posting mixed earnings in the first half of 2011, Nvidia shares fell to its lowest point of the year at just under $12 per share.
But through bigger investments in R&D, Nvidia widened its lead against AMD in chipmaking architecture. Since AMD was fighting wars on two fronts -- against Nvidia in GPUs and against Intel in CPUs -- it couldn't pump as much money into improving its GPU architecture. Instead, AMD boosted clock speeds, which improved horsepower at the cost of power efficiency.
Customers noticed the difference, and Nvidia took the lead. Between the first quarters of 2011 and 2016, AMD's market share of add-in graphics boards plunged from 40.6% to 22.8%, according to research firm JPR. Nvidia's market share climbed from 59% to 77.2%, thanks to steady demand from high-end gamers and the sale of GPUs for machine learning purposes. Nvidia then wisely backed out of the mobile baseband market and pivoted its Tegra chips -- which weren't gaining much ground against Qualcomm -- into infotainment systems in connected cars. That move gave Nvidia a huge first-mover's advantage in the auto market and gave it the foundation to launch end-to-end computing solutions for driverless cars.
Thanks to those smart decisions, Nvidia's annual revenue rose 41% between fiscal 2011 and 2016, while its earnings per share improved 151%. Consequently its stock price has nearly quadrupled since its lowest point in 2011.
At the beginning of 2011, many analysts scoffed at the idea that Amazon -- with a market cap of about $80 billion, a P/E in the mid-70s, and inconsistent profit growth -- could move much higher. But they underestimated the potential of two pillars of growth for the company: its prisoner-taking Amazon Prime ecosystem and its AWS (Amazon Web Services) cloud platform.
Prime was initially introduced in 2005 to provide Amazon shoppers with free two-day shipping on select orders. In late 2011, Amazon added free e-books to the lending library for Kindle owners. Over the following years, Amazon added free music and video streaming, cloud storage, free same-day delivery in select areas, and other lucrative perks. It then tethered new products and services to that ecosystem, like grocery delivery services, Dash buttons, Dash-enabled appliances, and Echo smart speakers.
That blitz of new features made subscribing to Prime a fairly easy choice for regular Amazon customers, and helped the e-commerce giant widen its moat against other rapidly growing tech giants like Alphabet, Netflix, and Apple. Research firm CIRP claims that Amazon started 2016 with 54 million Prime customers in the U.S. -- a 35% increase from the previous year.
AWS started out as the cloud-based backbone of Amazon's online marketplace, but it has since evolved into the largest cloud platform provider in the world. AWS revenue rose 64% annually last quarter and accounted for 9% of Amazon's sales, while operating income surged 210% and accounted for 56% of its operating profits. AWS' explosive growth and high margins give Amazon something it didn't have before -- stable earnings to complement its robust sales growth.
Fueled by the growth of Prime, AWS, and its ever-widening selection of retail items, Amazon's annual revenue more than doubled between fiscal 2011 and 2015, while its share price surged nearly 300%.
But what about future growth?
But as all responsible investors should know, past performance doesn't guarantee future gains. Some investors believe that Nvidia, which is now trading at 40 times earnings, is now overvalued relative to its chipmaking peers and due for a pullback. Others believe that strong demand for Nvidia's new graphics cards, and expansion into cars and data centers, supports that higher valuation.
The bears believe that Amazon can't justify its current P/E of nearly 300, but the bulls believe that stable profit growth from AWS will enable it to disrupt the IT industry and bring its valuations down to sustainable levels. Therefore, investors should do their due diligence into both stocks to see which stories they believe.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Amazon.com and Qualcomm. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Apple, Netflix, Nvidia, and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.