Shares of Nvidia surged to record highs Thursday, following the artificial intelligence chip giant’s after-the-bell quarterly results that effortlessly smashed quite possibly the highest bar ever set heading into an earnings release. While known for sizeable pullbacks in the past, the upward trajectory of Nvidia’s stock last year and this year cannot be denied. So, what are investors who own little to no Nvidia shares to do if they want to buy and participate in what Wall Street and the Club believe will be higher and higher highs in the coming years? The answer to that question is not an easy yes or no because of several variables. First, we aim to never chase big rallies in stocks, especially since Nvidia’s market cap gained some $250 billion Thursday to more than $2.62 trillion, according to market data provider FactSet. The Club had a 2 rating on Nvidia’s shares before the earnings print, and we maintain that rating, which means waiting for a pullback before considering buying. For the Club portfolio, while looking for an opportunity to upgrade shares back to our buy-equivalent 1 rating, we would need to see a sizeable dip to consider adding to our own position. Here’s why. We’ve been in Nvidia stock since 2019, years before the AI revolution was sparked by ChatGPT’s viral moment shortly after its late 2022 launch. Our cost basis on Nvidia is nearly $156 per share. The stock was above $1050 for much of Thursday’s session. We raised our price target to $1,200 on Wednesday evening. Like Apple , Jim considers Nvidia an “own it don’t trade it” stock. And like Apple, years and years of gains have made Nvidia one of our top holdings — the portolio’s fourth largest stock, with a 4.25% weighting. That’s nearly what we consider a full position, around 5%, to maintain a diversified portfolio. (Apple is our biggest position with a 5% weighting.) Nvidia Why we own it : Nvidia’s high-performance graphic processing units (GPUs) are the key driver behind the AI revolution, powering the accelerated data centers being rapidly built around the world. But this is more than just a hardware story. Through its Nvidia AI Enterprise service, Nvidia is in the process of building out a potentially massive software business. Competitors : Advanced Micro Devices and Intel Most recent buy : Aug 31, 2022 Initiation : March 2019 Second, just because buying Nvidia for the Club might not be right, it may be right at lower levels for investors who have no shares or have a small position and a cost basis much higher than where we stand. After all, the point of the Investing Club is not for members to blindly follow our ratings or moves but for you to be a more educated investor, take control of your own financial decisions, and develop your own disciplines. With that, let’s think about Nvidia stock from the perspective of a long-term investor— and that’s the key consideration, the investment horizon. If you are a long-term investor, then you are forced to reconcile the importance of valuing corporate fundamentals with the idea that a valuation based on a 12-month time horizon — in this case, the forward price-to-earnings multiple — can only take us so far. Valuation, especially for a long-term investor is part art and part science. In the case of Nvidia, the science part — where analysts do the legwork to determine how much money a company can make over the next 12 months — has been about as wrong as it gets. It’s the artists, or rather the art critics — Nvidia CEO Jensen Huang being called the modern-day Leonardo da Vinci by Jim — who have been right. At the beginning of the year, Nvidia stock traded at $481 per share on a $20.80 forward earnings estimate or a forward P/E multiple of 23 times. The company is now estimated to earn $26.59 per share this year. So, in retrospect, the stock was trading closer to 18 times at the start of the year, as Jim wrote in his morning Top 10 things to watch in the market commentary. What do we mean by that? Sometimes with a stock like Nvidia or Apple, you need to zoom out and think about the grand scheme of things more than the earnings estimates for a given 12-month period. That’s especially true when analysts have consistently demonstrated an inability to fully appreciate the opportunity at hand — in Nvidia’s case, generative AI, a technological breakthrough on par with electricity and the internet. Third, If we’re looking to buy a stock like Nvidia after the run it’s had, we can’t think about what the next 12 months bring. We must think about what the world looks like 10 years from now. For example, can you imagine if upon first seeing electricity light up a light bulb, you simply asked, how many light bulbs can General Electric sell? The value of GE all those years ago was not in the light bulb but in electricity. Generative AI can be viewed similarly. It’s not only about the copilot AI chat assistants or the things we see right now. It’s about the way it’s going to disrupt every aspect of our lives. It’s also about autonomous vehicles, drug discovery and other advancements in health, enhanced cybersecurity, a means of addressing labor shortages, and so on. Nvidia is positioned to be at the heart of all of it, not just because of its hardware but its rapidly growing software and services solutions as well. You’re not going to see this in a 12-month earnings estimate, and you’re not going to accurately model that out over a decade. It requires stepping back and thinking beyond the Excel spreadsheet. If you’ve sat out the entire Nvidia ride and believe that it’s only going higher over time because of all the aforementioned secular trends, you may be tempted to put on a starter position. If you do (again, this would go against our discipline to do on big rally day), just understand that pullbacks, violent ones — justified or not — are par for the course with a stock like this. The good news is the stock is being driven by fundamental earnings growth more than anything. While the current multiple has expanded a bit to about 40 times forward earnings, the stock is now trading pretty much around its five-year historical forward P/E average. Will we be looking back to the current 40 times valuation in the future and again see it as cheap through the prism of hindsight as 20/20? NVDA 5Y mountain Nvidia 5 years Only time will tell, but it’s happened enough during this AI boom to favor the odds. And those odds certainly went up after what we saw from Nvidia on Wednesday evening from earnings to guidance and to a vision from CEO Jensen Huang of AI dominance for years to come. Our earnings commentary covered all that and Nvidia’s planned 10-for-1 stock split announcement. One update we found particularly relevant to the question of whether Nvidia can be bought was from CFO Colette Kress. She said on the post-earnings conference call that the automotive market is expected to be Nvidia’s largest enterprise vertical within data center this year, with Tesla working with an astounding 35,000 H100 chips to power its self-driving ambitions. That’s even larger than the 24,000 chips Meta Platforms leveraged to train its Llama 3 model. That’s intriguing because we would’ve expected health care to be the largest vertical. However, the update bodes very well in the years ahead for Nvidia’s automotive segment. Automotive is expected to do $1.4 billion in revenue this year and then nearly double that in two years. That means rapidly growing verticals, not only in automotive but health care and sovereign AI initiatives at the government level. That’s even before talking about the benefit to Nvidia from the AI-driven personal computer refresh cycle. Nvidia chips are still big in video gaming. But it’s clear that the “gaming” segment is about much more. Kress also said on the call: “GeForce RTX GPUs [graphics processing units] are perfect for gamers, creators, AI enthusiasts; and offer unmatched performance for running generative AI applications on PCs. NVIDIA has full technology stack for deploying and running fast and efficient generative AI inference on GeForce RTX PCs.” (Jim Cramer’s Charitable Trust is long NVDA, AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Shares of Nvidia
So, what are investors who own little to no Nvidia shares to do if they want to buy and participate in what Wall Street and the Club believe will be higher and higher highs in the coming years?
The answer to that question is not an easy yes or no because of several variables.
