Four giant companies have been at the forefront of the artificial intelligence (AI) boom in 2023. Nvidia (NVDA 4.43%) has been the biggest winner, by far, with its shares more than tripling year to date. Amazon (AMZN +1.04%) and Google parent Alphabet (GOOG +1.39%) (GOOGL +1.50%) have seen their stocks skyrocket more than 50%. Microsoft (MSFT 2.17%) lags the group, but its shares have still jumped nearly 40%.
Stock performance isn't the only area in which Nvidia is excelling, though. Here's how the chipmaker is trouncing Amazon, Alphabet, and Microsoft on another critical investing metric.
NASDAQ: NVDA
Key Data Points
Nvidia is head and shoulders above the pack
Return on invested capital (ROIC) ranks as one of the most important financial metrics for investors. It measures how efficiently a company uses its capital to make profits. A company that can consistently deliver a high ROIC typically performs well over the long run.
As the chart below shows, Nvidia is head and shoulders above the pack when it comes to ROIC. Alphabet and Microsoft have very good numbers, as well, but they're far behind Nvidia. Amazon comes in dead last.
Data source: New Constructs. Chart by author.
There's a simple reason why Nvidia is handily beating Amazon, Alphabet, and Microsoft on this metric. ROIC is calculated by dividing net operating profit after taxes (NOPAT) by invested capital. NOPAT is driven largely by earnings. Nvidia's earnings have gone through the roof in recent months.
The explanation for why Nvidia is generating much greater profits these days is also straightforward. Companies are scrambling to develop generative AI applications. The company's graphics processing units (GPUs) are widely viewed as the gold standard in running such apps.
The ROIC challenge
Nvidia's primary challenge is to sustain its high ROIC level. That's easier said than done, though. The chipmaker has generated exceptionally high ROIC in the past but wasn't able to keep it up for an extended period of time.
NVDA Return on Invested Capital data by YCharts.
One major problem is that the demand for chips can be highly cyclical. It's often a boom or bust market.
It's possible that the increasing adoption of AI could alleviate this issue to some extent. However, there are already some signs that the intense GPU demand that Nvidia has enjoyed so far this year could wane at least somewhat in the near future. For example, Microsoft Chief Technology Officer Kevin Scott recently stated that the supply-demand imbalance for Nvidia's GPUs is "getting better by the week."
Is Nvidia stock a no-brainer buy due to its high ROIC?
This uncertainty about whether or not Nvidia can continue generating a high ROIC raises a legitimate concern for investors. Even if the company does maintain an ROIC at high levels, though, it doesn't make its stock a no-brainer buy.
There are other factors that investors must consider about Nvidia (or any other stock) in addition to ROIC. Valuation ranks high on the list. Some could look at Nvidia's forward earnings multiple of 29x and decide to look for other investment opportunities.
However, growth prospects are also critical. Exceptionally strong growth changes the dynamics for valuing stocks. Wall Street analysts project that Nvidia will be able to deliver average annual earnings growth of nearly 79% over the next five years. If the company can achieve such impressive growth, its current valuation isn't problematic.
Of course, predicting growth for five years into the future is more of an art than a science. A lot can happen to cause forecasts to be blown out of the water -- for the good or for the bad.
