Long-term investment is the key to life-changing returns in the stock market, and few companies highlight this concept better than Nvidia (NVDA 0.27%). If you bought $1,000 worth of the chipmaker's stock 10 years ago, you would have roughly $267,000 today -- a return of 26,600%.
That said, past returns don't guarantee future results -- especially in an incredibly speculative new industry. Let's examine the pros and cons of Nvidia stock to determine whether the legendary technology giant still has multibagger potential over the long term.
NASDAQ: NVDA
Key Data Points
A history of boom and bust cycles
Nvidia's core business has always been designing and selling graphics processing units (GPUs), a type of computer chip capable of parallel processing (running multiple calculations simultaneously). This tech proved crucial in rendering video game graphics, helping Nvidia dominate the custom PC and gaming laptop markets in the 2000s.
When Bitcoin launched in 2009, GPUs found another use case in cryptocurrency mining, leading to Nvidia's second boom cycle. At the time, many blockchains used GPU computing power to validate their networks and mint more coins in a process called proof-of-work (PoW). This market declined substantially in 2022, erasing billions from Nvidia's market cap.
Video gaming and crypto mining hardware are both represented in Nvidia's gaming segment, which posted third-quarter sales of just $3.3 billion or just around 9% of total sales. Generative artificial intelligence (AI) has become the company's latest boom cycle, causing its data center business to soar to represent 88% of total sales. The company is very nondiversified and vulnerable to another rapid change in its fortunes.
How will the generative AI story end?
Over the next 10 years, Nvidia's AI hardware business could face threats to its growth and profitability. And it isn't hard to see why. With a gross margin of 75%, Nvidia is selling hardware at software-level margins. For context, software-as-a-service (SaaS) giant Microsoft has a gross margin of just 69%, selling mainly digital products and services.
Nvidia's market dominance will naturally encourage customers to replace its products wherever possible. While Nvidia seems to be able to keep direct competition (from other AI chipmakers like Advanced Micro Devices) at bay, it can't stop "hyperscaler" clients like Alphabet and Amazon from designing their own custom chips or simply holding on to their old Nvidia hardware instead of upgrading to the latest models every year.
Image source: Getty Images.
Nvidia's sky-high margins may also come under increasing pressure from suppliers like Taiwan Semiconductor, which helps manufacture its highest-end AI chips. In June, analysts at Morgan Stanley reported that the fab is considering raising production fees for Nvidia. And if this is true, it could eventually eat into the company's margins.
To be fair, however, Nvidia's third-quarter operating income soared 174% to $18.6 billion. And its forward price-to-earnings (P/E) of just 33 seems quite low compared to this growth rate, suggesting a possible slowdown in earnings growth may already be partially priced in.
Is Nvidia stock a buy?
Generally, time in the market is better than timing the market. And even if you bought Nvidia stock at the peak of its previous boom cycles, you would still have come out ahead if you held shares long enough. That said, with a market cap of $3.5 trillion, Nvidia has become the second-largest company in the world. So, things may be different now.
Newton's second law of motion states that the larger an object is, the more force is needed to move it. And while the 18th-century physicist probably didn't have financial markets in mind, the concept can hold true for stocks. Investors who buy Nvidia now are making some very optimistic assumptions about the future of the AI industry. And it may make more sense to wait until the hype dies down before buying shares.
