June 7, 2024


June 7, 2024

What Every Investor Needs to Know about NVIDIA

Artificial intelligence technology leader NVIDIA (NVDA) is now the second most valuable company in the world. NVDA is arguably on a path to become the most impressive commercial success story in history, if it is not already. Famously conceived at a northern California Denny’s, the restaurant chain where co-founder and CEO Jensen Huang was once a busboy, NVDA is now valued at approximately $3 trillion, only slightly behind Microsoft (MSFT) and ahead of Apple (AAPL).

Without diminishing NVDA’s contribution to technological advancement, its performance as a stock is perhaps just as awe-inspiring. Although NVDA shares have declined from time to time (sometimes substantially), the stock’s performance over multiple time frames is extraordinary.

For those new to investing, it’s a remarkable testament to the magic of long-term compounding at high rates of return. The table below is a good one to show your kids to motivate them to save and invest (at the risk of creating very unrealistic expectations).

When originally naming the company, the founders wanted to use the letters “NV,” which appeared in early corporate documents and stood for “next version.” Huang rather presciently suggested NVIDIA as a play on the Latin word “invidia,” which means to look upon someone with envy.

There are perhaps few things now that can inspire as much envy as a long-term ownership position in NVDA shares.

Jensen Huang’s American Journey

Jensen Huang built his career on computer graphics and has always appreciated impressive visual displays. He once gave an interview on a Chinese television talk show in which he recounted how when he was eight years old, he sprayed lighter fluid into a swimming pool, lit it on fire, and then jumped in to watch the spectacle from beneath the surface.

Now worth some $100 billion, Jensen was born in Tainan, Taiwan in 1963. When he was five years old, his family moved briefly to Thailand. At the age of nine, he was sent to live with his uncle in Tacoma, Washington. He soon found himself in Kentucky at the Oneida Baptist Institute, a religious reform academy that his uncle mistook for a prestigious boarding school.

He spent a few years in Kentucky, where he was relentlessly bullied by his pocket-knife wielding classmates, who were largely children with behavioral problems. Students had to cross a rickety footbridge over a creek to get to the school building. When he first arrived, his classmates would try to shake the bridge to get him to fall.

Jensen would later lead these same classmates through adventures in the woods. He returned to Kentucky in 2019 to donate a new building to the school. He credits the experience with helping him develop resilience.

Jensen was eventually reunited with his parents, who settled in Oregon. He graduated from Aloha High School at the age of 16. As a student there, he worked as a busboy at the local Denny’s. He then attended Oregon State University, where he majored in electrical engineering. Jensen would later pick up a masters in engineering from Stanford.

In 2022, Jensen donated $50 million to Oregon State to fund the Jen-Hsun and Lori Huang Collaborative Innovation Complex, which will become a supercomputing research center. (Jensen is how he has referred to himself professionally throughout his career, but he chose the more authentically Chinese representation of his name for purposes of this project.)

Lori Huang (then Lori Mills) was one of only a handful of women in his engineering program at Oregon State. She happened to be his lab partner. Jensen was one of the youngest students in the program and looked even younger than he actually was. It took him six months to work up the courage to ask her on a date. They got married a few years later. They have two children, Madison and Spencer, who both work at NVIDIA.

Lori and Jensen Huang

Why should you care about NVDA?

Clearly, if you own NVDA shares directly, or are now tempted to buy the stock (some 25 years after its IPO and following a 300,000+% total return), you have a compelling interest in understanding the company. Even if you don’t own NVDA directly, most stock market investors already have quite a bit of exposure to NVDA to the extent they own passive funds or ETFs that track major equity indices.

NVDA is currently about 6% of the S&P 500, 8% of the Nasdaq 100, and even 4% of the MSCI ACWI, a global index that essentially tracks every listed company in the world. NVDA has risen nearly 150% thus far in 2024, which has driven more than one-third of the approximately 12% total return of the S&P 500.

Beyond any investor’s direct or indirect financial exposure, NVDA is important to understand because it is leading the AI revolution. Many stocks, well beyond the tech sector, are now to a certain extent reliant upon NVDA’s success for their own growth stories. NVDA also now plays a crucial role in broader stock market sentiment, as reflected in the humorous meme below that we came across.

NVDA is changing the world. We of course hear this a lot from companies, who have a natural inclination to hyperbolize any innovation, however marginal. But even the most hardened cynic has to acknowledge the technological breakthroughs NVDA is leading. Having a working understanding of NVDA can help shed light on the future direction of the economy and the entire technological landscape.

So what exactly does NVDA do?

Most people grasp that NVDA is somehow an artificial intelligence play. This is of course true, but it’s worth zeroing in on the area where NVDA has really contributed to the development of AI: accelerated computing.  

NVDA is the pioneer of GPUs, or Graphic Processing Units. GPUs are responsible for the enormous innovation that has been taken place in video games and other applications of computer graphics. Until fairly recently, NVDA was primarily known for its importance to the gaming market.

Every computer has a CPU, or Central Processing Unit. At the risk of oversimplification, a CPU is basically the brain of a computer where all of the major processing functions take place. A GPU is a separate “parallel” processor that is designed to perform specific tasks (like graphics) that are mathematically intensive and require great speed.

If the CPU is the boss who runs the whole show, the GPU is like the mathematically gifted guy in the accounting department who runs all the numbers when he is told to do so—and gets it on the boss’s desk by 5pm.

The first phase of NVDA’s success, which generally speaking extends from its inception through 2022, was achieving dominance in GPUs for purposes of video games, 3-D modeling, animation, etc. The second phase of NVDA’s success, and what has driven the stock to its current heights, has been the application of parallel processing to accelerated computing in data centers.

It is no longer just about having a separate processor within your PC or laptop that can perform high speed calculations for graphics. We now have much more powerful processors that live in data centers that perform high speed calculations on a much grander scale for a much wider set of applications, including AI.

Remarkably, it was less than 24 months ago that NVDA shares were practically in free fall. After peaking in November 2021 around $330 per share, NVDA shares would trade as low as $112 by October 2022, a more than 65% decline.

Total Return (10/31/2021 to 10/31/2022)

NVDA melted down in 2022, a casualty of the growth-led sell-off. Interest rate hikes were rapidly implemented to combat the inflation shock. This brought down the market as a whole, but especially high growth technology names, which had for the most part soared in 2021.

At the time, NVDA was primarily regarded as a best-in-class designer of GPUs for the video game market. Artificial intelligence was understood as an important future market opportunity. But like other technology themes at that dark moment for the tech sector, AI was seen by many as having been overhyped during the pandemic-era stay-at-home tech bubble.

In retrospect, it wasn’t hype. In fact, NVDA’s data center business was in the process of taking off. Yet investors, primarily focused on declining revenue in NVDA’s more cyclical gaming business, were dumping the shares.

A few months after NVDA shares bottomed, NVDA reported data center revenue growth of 41%, with revenue reaching $15 billion for the fiscal year ending January 2023. In the following fiscal year ending January 2024, NVDA’s data center revenue increased 217% to $47.5 billion.

There is now vast demand for NVDA’s data center GPUs. Although there are some competitors, NVDA’s are widely perceived as the best.

Elon and I were begging, I guess is the best way to describe it… An hour of sushi and begging. - Larry Ellison, Chairman of Oracle, describing a 2023 meeting to source GPUs from Jensen Huang

As the market leader in accelerated computing chips and related technology, NVDA is expected to continue to deliver explosive data center revenue growth. Analyst consensus forecasts currently indicate $104 billion in data center revenue for the fiscal year ending January 2025, which represents more than 100% growth, and $141 billion for the next fiscal year, which implies 36% growth (source: FactSet).

The gaming segment, while still enormously valuable, is actually becoming relatively unimportant in the scheme of things. Gaming is expected to generate less than one-tenth as much revenue as the data center segment in the January 2026 fiscal year.

Why is NVDA worth so much?

NVDA is not just fast growing from a revenue perspective but is also enormously profitable. NVDA is “fabless,” which means it invests very little in manufacturing. The vast majority of the manufacturing gets outsourced to other players in the semiconductor industry, in particular Taiwan Semiconductor (TSM). NVDA now accounts for more than 10% of TSM’s total revenue, second only to AAPL.

NVDA is primarily selling intellectual property, similar to how Coca-Cola (KO) is largely selling its magic formula. Coke’s network of bottlers around the world deal with the operational challenges and costs of production and distribution.

NVDA’s “capital light” business model means it enjoys very high profit margins relative to peers and has minimal capital expenditures as a percentage of sales. NVDA’s operating margins currently exceed 60%. Analysts expect NVDA to spend less than $2 billion this year on capital expenditures, an almost immaterial sum for the company.

Consensus forecasts for NVDA’s net income for fiscal year 2026 (ending January 2027) are approximately $100 billion. This implies a forward price/earnings multiple around 30, which is only a touch higher than tech sector peers.

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Does NVDA have even more upside?

NVDA’s valuation is for the most part a function of growth. Earnings three years forward are basically expected to double from current year levels. If the company delivers on these expectations, or exceeds them, there could be further upside as the market should continue to support a high multiple of current earnings.

Put differently, NVDA now trades at about 45x current year earnings estimates. If in three years, NVDA actually delivers on consensus earnings forecasts and the growth outlook for NVDA remains elevated, one could imagine the stock continuing to trade at a high multiple of what will then be much higher earnings.

If NVDA still trades at 45x earnings three years from now, and current consensus forecasts materialize, the stock price would more or less double relative to current levels.  

What are the risks?

It is easy to get excited about NVDA’s past, current and future success. But investors do need to worry about a number of things.

(1) Competition

Accelerated computing is an emerging area, and NVDA has an early lead as it leverages its technological dominance in the gaming market. Advanced Micro Devices (AMD), Intel (INTC) and others are in the market or keen to enter.

At the moment, NVDA enjoys considerable pricing power, which could erode, especially if the industry growth rate decelerates. If the supply/demand imbalance were to moderate, and customers like Elon and Larry are no longer begging for chips, pricing could come down.

NVDA data center GPUs are not cheap

Defenders of NVDA will point out that NVDA not only has enormous technological advantages, but customers are now standardizing around its products. The reason we have so many mega-cap technology stocks is that the sector has a tendency towards winner-take-all economics, thanks to some variation of network effects. So NVDA is—and has the potential to stay—the 800 pound gorilla in data center technology.

(2) Manufacturing risk

NVDA’s capital light model is a strength but also a potential vulnerability. NVDA relies on third parties to manufacture its products, especially TSM. A military confrontation over Taiwan, or even the threat of it, could severely damage perceptions of NVDA’s ability to deliver product to its customers. NVDA is looking to diversify into American production facilities over time, and potentially work with INTC, but this is likely years away.

(3) Valuation risk

High multiple growth stocks are very sensitive to any perceived change in the growth outlook as well as overall market conditions. NVDA is a “high beta” stock, which means it is statistically much more sensitive to changes in the direction of the broader market than the average stock.

We witnessed in 2022 how NVDA dramatically underperformed not just the S&P 500 but the Nasdaq 100 as growth stocks fell out of favor.

(4) Sentiment risk

NVDA is a market darling. It is perceived as unstoppable. Everyone wants in. But sentiment can shift rapidly. Fear of missing out can quickly become fear of missing out on cashing out.

(5) Regulatory risk.

Like other mega-cap technology companies, NVDA’s current market dominance has caught the eye of regulators. This could become problematic over time.

(6) The unknown

Accelerated computing is an exciting new avenue for the technology sector, but it is also uncharted waters. Things change. Just as investors a couple of years ago misunderstood the magnitude of the data center growth opportunity, they don’t have perfect visibility into how the next two years will play out. Investors today are extrapolating trends, but trends do not always persist.  

Does the stock split mean anything?

Probably not much. After the close of trading on Friday, June 7, NVDA shareholders will receive nine additional shares for every one share they own. The stock split is a nice signal of confidence, has attracted investor interest and perhaps contributed to recent momentum.

Ultimately, however, ten dimes are worth as much as a dollar. Companies execute stock splits to improve liquidity. While a lower share price could improve access to smaller investors, NVDA has a $3 trillion market cap. Small investors should have less ability to influence how NVDA trades relative to meme stocks, for example, that have market caps in the single digit billions or lower.

Liquidity also works both ways. Retail NVDA shareholders will have greater flexibility to sell down their position after the stock split.

Should you buy or sell NVDA?

Perhaps the most important question of all is whether an investor should jump on the bandwagon or avoid it.

NVDA is clearly a phenomenal company that has a leading position in a growing market that has open-ended long-term growth potential. It has delivered extraordinary results for investors. It is not irrational to want the be part of this.

As we observed above, NVDA is already a major component of most equity indices, and NVDA is likely to be highly correlated with the overall direction of the market. Any decision to buy NVDA should be made in that context. How much NVDA do you actually already own?

NVDA may continue to deliver exceptional growth for years and as a result could have more upside. It is quite plausible it could outperform the market and tech peers. But it is a lot harder for data center revenue to grow from $100 billion to a $1 trillion than it will be to grow from $10 billion to $100 billion.

NVDA could continue to be a great investment, but it is almost physically impossible for the stock to deliver the sort of explosive returns it has in the past. The numbers at this point are simply too large.

The sell decision is interesting, because almost any investor who has an NVDA position is sitting on a large unrealized capital gain, perhaps a very large one relative to the size of the investment.

Let’s take the case of an investor who purchased the shares in October 2022 and is now sitting on an unrealized capital gain that is approximately 90% of the total market value of the position. If this investor were to sell his or her position, depending on his or her tax bracket, state residency and other factors, it could generate a substantial cap gain tax payment.

When sitting on an investment with an unrealized capital gain, one is in effect receiving an interest free loan from the government to continue to own the shares. When unrealized gains are particularly substantial, there is a cost to selling that can become material and should rationally be taken into account.


While everyone wants a firm answer, there are some investment decisions that legitimately fall into a gray area.

For investors who currently do not have any allocation to NVDA and want some exposure to its open-ended long-term growth potential, we see the logic of buying some, with eyes wide open to the risks, even after these extraordinary returns.  

For investors who already have significant indirect exposure to NVDA through passive funds or other vehicles, we think this is a very strong argument to look elsewhere for opportunities to play the AI theme. Only a few companies in the world have the kind of material representation in stock indices that NVDA now has, and these stocks (MSFT, AAPL, etc.) are generally much less volatile.

For investors who are sitting on large unrealized capital gains in NVDA and have a long time horizon, we see the logic of letting the investment continue to play out and seeing just how far Jensen Huang can take this business.

NVIDIA (NVDA): Company Snapshot


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