Most successful investing is slow, tedious, and takes years ... and that's OK. But every now and then, an exception comes along. Artificial intelligence (AI) chip company Nvidia (NVDA 6.18%) could be that company for this generation.
The stock is up an unbelievable 17,800% over the past decade alone. If you bought $10,000 worth of stock in 2014, you'd be sitting on nearly $1.8 million today. Of course, the big question is, what can investors expect moving forward?
It's not an easy question to answer as the stock already hovers around a $2 trillion valuation. But there are some clues.
Explaining Nvidia's remarkable gains
Nvidia's massive success wasn't a straight line. You can see below that most of Nvidia's gains came over the past few years, arguably making the staggering returns even harder to believe. So, what happened?
NVDA Total Return Price data by YCharts
The chip company specializes in graphics processing units (GPUs), which handle intense computing workloads. Nvidia's products were generally used for high-end gaming for a long time. However, the numerous technological advancements over the past decade changed everything.
Cloud computing signaled a monumental shift from on-premise servers to data centers. Nvidia began pivoting its business by acquiring a data center networking business called Mellanox for $6.9 billion in 2019. The rise of cryptocurrencies further boosted demand for Nvidia's chips. Bitcoin miners used GPUs like Nvidia's to power their mining rigs.
And, of course, the ever-rising interest in all things artificial intelligence (AI) in late 2022 began what investors see today. To Nvidia's credit, the company has been prepared for these tremendous shifts, whereas Nvidia's competition seemingly wasn't ready for it. That's why Nvidia has an estimated 80% to 90% of the AI chip market today, and it's growing its top and bottom lines at triple-digit rates.
You could say Nvidia caught lightning in a bottle. After all, such tremendous investment returns in such little time are pretty rare.
What can investors expect moving forward?
Understanding what drove Nvidia's past success is a natural lead to discussing the future for the company and its shareholders. To be clear, Nvidia's run isn't a fluke. The growth has backed it up. Somehow, the stock only trades at a forward P/E ratio of 32 today. That's arguably a bargain for a company that analysts expect over 30% annualized earnings growth from over the long term:
NVDA PE Ratio (Forward) data by YCharts
With that said, there are two potential problems here. First, Nvidia is dominating the AI chip market right now. Given the apparent gold rush of companies investing to build AI systems, Nvidia has a target on its back. Competitors will be trying to take share, and big technology companies are working on designing their own AI chips. Nvidia's long-term growth could depend heavily on how well it protects its market share.
Second, even assuming Nvidia lives up to long-term expectations, it's clear that at a $2 trillion market cap, the stock's best returns are comfortably in the past. Investors must temper their expectations moving forward and ponder the risks of baking so much assumed growth into the stock.
Here's the game plan
I don't want to risk sounding like I'm discrediting Nvidia's dominance. After all, the proof is in its recent earnings numbers. But investing is arguably more about looking ahead than at what's already happened. Expectations for Nvidia couldn't be any higher on Wall Street, which can become dangerous for investors.
As they say, the higher they climb, the further they can fall. Investors shouldn't dismiss Nvidia's prospects but respect the risks that increase as the share price does. Consider buying shares using a dollar-cost-averaging strategy, diversify your portfolio, and resist the temptation to go too heavily into one stock.
