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One of the big stock market tech stories of recent years has been the incredible growth of Nvidia (NASDAQ: NVDA). Over the past five years alone, Nvidia stock has soared by 1,410%.
So, how long has it taken to turn a £1,000 investment into a holding worth £10,000?
Stunning share price rise
The answer is around two and a half years.
Nvidia stock ended 2022 selling for less than a tenth of its current price. So, £1k invested in Nvidia stock then would be worth over £10k now.
That is even before taking dividends into account. That said, the current yield of 0.03% is not exactly the stuff of passive income dreams! Buying the shares at the end of 2022 would mean a yield today 10 times higher than 0.03% — but still well below 1%.
In this example, I have ignored the impact of exchange rate movements to keep things simple. In reality, though, such shifts are a risk of buying American shares as a UK investor. Sometimes they can reduce the overall return on an investment. But the opposite can also happen: it depends on which way (if any) the currency exchange rate moves during the lifetime of the shareholding.
Nvidia looks like a great business but may get even better
Even after that strong performance, Nvidia stock now sells for around 51 times earnings.
That is too high for my taste, which is why I have no plans to add the company to my portfolio for now. Still, it is quite striking that the price-to-earnings ratio is not even higher, given how brilliantly Nvidia stock has performed in recent years.
That reflects the fact that, while the share price has surged, so too have earnings.
Last year, for example, Nvidia reported basic earnings per share of $2.97. For 2022, the equivalent figure was $0.18.
So, while the share price has soared, it actually grew less quickly in that timeframe than earnings, meaning that Nvidia stock is arguably cheaper today than it was in 2022.
Can this sort of success continue?
Nvidia has a proven and massively profitable business model. It has a lot of proprietary chip designs as well as a sizeable existing client base. In the context of booming chip demand led by AI needs, that could mean that the business continues to grow at speed. This month Nvidia stock has hit an all-time high – but if the business keeps performing well, I reckon it may go even higher.
Why I’m waiting
However, while I see reasons to feel bullish about the outlook, the current stock price does not offer me the sort of margin of safety I look for when investing.
After all, the recent strong AI-fuelled chip demand could be the start of bigger things to come – but it may turn out to be a one-off blip before demand falls back to lower levels again.
Nvidia has a lot of proprietary knowledge but rivals are working very hard to steal their own march on selling chips. International trade disputes could also make it harder for Nvidia to keep growing in some markets.