Nvidia (NVDA -2.20%) is one of the highest-returning stocks in recent years. A $1,000 investment 10 years ago is worth a staggering $247,000 today. Even if you had waited until five years ago to invest the $1,000, you could now sell those shares for $33,000.
Moreover, investing in Nvidia stock has meant continuing to defy bears with its dominance of the artificial intelligence (AI) chip market and relentless stock price growth. Investors tend to earn higher overall returns when they allow winners to keep winning. Hence, suggestions that one should sell shares under such circumstances may seem counterintuitive.
Nonetheless, even the highest-conviction growth stocks tend to either plateau or turn negative over time. Here are three good reasons you may want to reduce the size of your Nvidia position and take some profits.
1. Reducing risk
First of all, if you've earned returns of tenfold or more, congratulations. Such a milestone usually takes years in some of the best growth stocks, if it occurs at all.
However, sometimes, the most challenging part of investing is managing winners. Some, like Amazon, continue to build on a decades-long track record of growth. Conversely, one-time darlings like Cisco Systems have yet to return to all-time highs achieved decades ago. Hence, while you want your winners to keep winning, defining what is a "winner" is not always easy.
The compromise may be to sell enough stock to recover your original investment, especially if you've earned a tenfold gain or more. This reduces your risk of net losses on Nvidia to zero. Also, if the sale is 10% or less of your Nvidia position, it positions you to continue achieving considerable returns from Nvidia should it keep moving higher.
2. Diversification
Recovering your original seed money also presents an opportunity to build a more diversified portfolio. Investment experts tend to encourage diversification in individual stocks, because failing to do so leaves an investor highly reliant on the performance of one company.
If you're up tenfold or more on Nvidia, it is probably a large part of your portfolio. Even if it made up 2% or 3% of your portfolio originally, it could make up the majority of your investments now, depending on your portfolio's performance.
Such conditions justify reducing one's dependence on Nvidia. Still, the process is as much art as it is science.
One example is Bill Ackman's Pershing Square fund and its investment in Chipotle Mexican Grill. Since the end of 2016, Pershing Square's Chipotle position has fallen from around 2.9 million shares to 744,000 as of the end of the first quarter.
By selling so many shares, Pershing Square missed out on massive gains. However, since Chipotle is still 20% of its portfolio, that was arguably the price of reducing dependence on one stock.
Ultimately, your specific allocation comes down to your comfort level with both Nvidia and risk in general. Nonetheless, if you are inclined to sell to increase diversification, now is likely a good time to do so.
3. Valuation
Valuations also make now a good time to diversify.
Admittedly, this can be difficult because valuations say different things. In Nvidia's first quarter of fiscal 2025 (ended April 28), net income rose 628% from year-ago levels. That translated into a price-to-earnings (P/E) ratio of 70 and a forward P/E ratio of 44. Given the growth levels, many investors will not perceive these earnings multiples as expensive.
Nonetheless, other valuation metrics point to some danger signals. Amid relentless stock price increases, the price-to-sales (P/S) ratio has risen to 38. Considering that the average P/S ratio of the S&P 500 is near historical highs at 2.9, it is hard to justify such levels even at a rapid growth pace.
Moreover, Nvidia stock trades at a price-to-book value ratio of 60! In comparison, rival Advanced Micro Devices sells for under 5 times its book value. Also, even with its recent increases, Qualcomm trades for a price-to-book value ratio of under 10. Nvidia outperformed these companies, but justifying such a difference in this metric may still be difficult.
Selling Nvidia stock
Ultimately, such difficulties highlight the challenge in managing a winner like Nvidia. As the leading AI chip company, it should remain a valuable holding for some time to come.
However, the outperformance does not negate all reasons for trimming holdings. In fact, the extent of its success may give investors some reason to take such an action.
In the end, you want your winners to keep winning. Still, whatever decision you make with your Nvidia stock, now is an excellent time to assess your risk tolerances, evaluate the health of your stock portfolio, and take actions to bring safety and balance to your investments.
