Is Nvidia a Good Investment?

A stock that has taken the world by storm this year is Nvidia, the 30-year-old American tech company that designs software, hardware, and fabless chips for specialized purposes. These purposes include data science, high performance computing, interactive 3-D graphics, automobile controls, and artificial intelligence. Fabless means that Nvidia designs computer chips but sends them to foundries to be made. Nvidia stock started the year at $147 and now trades for $406. The Nvidia stock surge brought its market cap over $1 trillion. Is Nvidia a good investment still or has all the short term profit been made? Will Nvidia thrive over the long term or will new tech come in and pass it by?

Increasing Demand for Semiconductor Stocks

Today’s world is becoming increasingly dependent on semiconductor components. The “internet of things” is evolving with computer chips in virtually anything electronic. Artificial intelligence applications promise to speed up research, enhance creativity, and make it hard to tell if you are communicating with a person or a device. The demand of computer chips will keep growing well into the future. This demand will be for basic chips used in basic devices for basic needs and more and more advanced chips like Nvidia makes for AI applications. This scenario would indicate that investments in semiconductors stocks would be a good idea over the long term.

Semiconductor Stocks Are Vulnerable to Swings in the Economy

When the Covid-19 pandemic hit and the world economy collapsed, two things happened with computer chips. Demand fell so there was a temporary market glut. Then, when the economy surged with so much pent up demand as the pandemic loosened its grip, there was such a shortage of basic chips for the auto industry that production fell and car prices soared. Historically, fortunes of semiconductor companies have always been tied to the economy. Thus, a long term prospect like Intel may go through a down phase before recovering. This view of semiconductors tells you to be careful investing in the sector.

The Semiconductor Industry Has the Same Issues as Other Technologies

The famous investor Warren Buffett has tended to avoid tech stocks. This is because today’s top tech can so easily be surpassed by another company’s new tech within just a few years. Thus it can be difficult assessing intrinsic stock value throughout the tech sector. Using this reasoning we have to question if Nvidia will remain at the top of the semiconductor “food chain” for chips that drive artificial intelligence applications. A good question to ask in terms of Nvidia at this point is how much of the stock surge is based on financials and prospects going forward and how much is based on the current craze to invest in anything related to AI, even if that only means a new stock has AI in the name!

Nvidia History as an Investment

Adjusting for stock splits, a current share of Nvidia was worth $0.82 in 1999. It was worth $5 at the end of 2014. It peaked at $67 in October of 2018 and fell to $32 in December of that year. Nvidia peaked again at $329 in November of 2021 at the end of Covid recovery surge before the US Federal Reserve started raising interest rates. Nvidia fell to $125 a share by September of 2022 before it started its AI-related climb. While Nvidia grew its business and its stock price over the years, it has been subject to the same economic forces as other companies. What distinguishes it now is that Nvidia is the dominant producer of the high end computer chips that drive AI applications. To the extent that more and more developers design and build AI products, demand for their chips will grow. To the extent that they stay ahead of their competition with improved chip designs the stock may have more room to grow. To the extent that another black swan event like the Covid-19 pandemic devastates the global economy, demand for their chips and the price of Nvidia stock could fall precipitously. All things considered we think that Nvidia is a good investment for the long term.

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