There has been a lot of talk in the media about a correction. NVIDIA (NASDAQ: NVDA) stock recently. This represents a decline in the stock price of 10% or more from its recent high.
Normally, this wouldn’t be news, as stocks are constantly “correcting.” But in Nvidia’s case, due to its sheer size, the 13% drop in share price meant that its market value decreased by more than $500 billion in June.
This corresponds to the market capitalization of three HSBCs and a Tesco!
Would this have been enough to wipe out the gains of an investment made in early June?
Climb even higher
Amazingly, no. The stock price started the month at a split-adjusted price of $109. As I write this, it is expected to end it at $124, a very respectable gain of 13.75%.
So £5,000 invested about four weeks ago would now be worth £5,685 on paper. And the much-vaunted correction? Well, that simply brought the share price back to where it was in mid-June.
In other words, the recent decline wiped out about two weeks of gains. Nvidia stock is still up about 26,280% in a decade, so this decline was, by and large, short and insignificant.
Warren Buffett says: “If you don’t think about owning a stock for ten years, don’t even think about owning it for ten minutes.“ Nvidia shows why.
Breathtaking margins
ChatGPT was released in November 2022 and triggered a tidal wave of spending on Nvidia’s graphics processing units (GPUs), a significant portion of which came from deep-pocketed cloud platforms such as Amazon Web Services (AWS), Microsoft Azure and Google Cloud.
They are investing huge sums to meet the increasing demand for cloud-based, AI-driven applications that rely on the powerful processing capabilities of GPUs.
This enormous demand was reflected dramatically in Nvidia’s financial reports. Sales and profits skyrocketed, exceeding Wall Street’s already high expectations.
One metric that stands out to me is the incredible increase in the company’s gross margin as demand has increased, rising to over 72% in fiscal 2024!
As a reminder, gross margin is the percentage of revenue that remains after deducting the cost of goods sold. This number not only shows that costs are under control, but also Nvidia’s pricing power. Companies pay top dollar to get their hands on those golden GPUs.
The competition is coming
However, we know that this will not always be the case, at least not to this extent. Supply will catch up with demand and Nvidia’s rapid growth rate will slow dramatically.
In addition, large cloud providers (the largest customers) are increasingly developing their own AI chips to reduce dependence on Nvidia. While I expect the company to remain a major player, this is likely to create a more difficult competitive environment going forward.
AI bubble?
We will only know in hindsight whether we are currently in an AI bubble. If so, I would expect a massive drop in Nvidia stock in the next few years as the bubble bursts or even bursts.
Right now, I’d rather invest in Nvidia through technology-focused mutual funds or simply in cheaper AI-related stocks. There are plenty to choose from.
The post If I had invested £5,000 in Nvidia shares at the beginning of June, here’s what I would have earned now appeared first on The Motley Fool UK.
Further reading
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. HSBC Holdings is a promotional partner of The Ascent, a Motley Fool company. Ben McPoland has positions at Alphabet and HSBC Holdings. The Motley Fool UK has recommended Alphabet, Amazon, HSBC Holdings, Microsoft, Nvidia, and Tesco Plc. The views expressed on companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
