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I hate jumping on an investment bandwagon too late but that’s exactly what I did with Nvidia (LSE: NVDA) shares.
Ideally, I prefer to buy out-of-favour companies and wait for their share prices to recover. Fat chance of that here. But when the stock dipped in April after Donald Trump announced his 90-day tariffs, I bought in and I’m up around 50% in months. That’s great, but it leaves me with a dilemma. Should I bank my profit and move on?
S&P 500 star
There are good reasons to do so. They say it’s never wrong to take a profit. Also, Nvidia is already worth $4.34trn, the largest market cap in the world.
In the past five years it’s grown an astonishing 1,253%. If it repeated that feat, the valuation would hit $57.7trn, roughly half the size of the total global economy ($115trn today). Sooner or later, expectations have to cool.
Nvidia has been swept alon by the artificial intelligence boom, but investors are wary after OpenAI CEO Sam Altman hinted that AI stocks may be in a bubble. The gains have already slowed, with Nvidia up a modest (by its standards) 40% over the past year and slipping 1.55% last week.
Friday’s rebound of 1.72% was only thanks to Jerome Powell hinting that US interest rates could be cut in September, which shows how wobbly sentiment can be. Despite its punching power, Nvidia is still at the mercy of wider events.
Reasons for optimism
This week’s Q2 results on Wednesday 27 August will be crucial. Refinitiv forecasts earnings per share of $1 on revenues of $46bn, a modest increase from 96 cents and $44.06bn in Q1.
Analysts at HSBC, Morgan Stanley, Wedbush and UBS have all lifted their price targets, which suggests they’re optimistic about both numbers and guidance.
Investors will also be watching China. Nvidia has resumed AI chip sales there after agreeing to hand 15% of its Chinese revenues to the US government. Last quarter, restrictions wiped out $2.5bn of business.
Despite the risks, AI is potentially transformative. Nvidia sits at the heart of that ecosystem. For investors willing to take the long-term approach, there may still be a case to consider buying.
Why I am staying put
Nvidia shares now trade on a price-to-earnings ratio of 57.3. That leaves little margin for disappointment. Any miss on earnings or guidance could send the stock sharply lower. Another worry is that most companies investing in generative AI are not yet making money from it. Their spending is highly speculative. Need I mention the dotcom boom and bust?
Inflation and interest rates are both proving sticky, which will hit growth stocks like this one by downgrading the value of their future earnings in real terms.
I was tempted to sell ahead of Powell’s speech last week, but held back and I’m glad I did. There are too many moving parts to second-guess the market like that.
That’s why I invest with a long view, taking advantage of dips to buy, then holding on. I sell only if the underlying case changes. I don’t think it has. AI remains a game changer.
On that basis, I am sticking with my holding. I’ve also learned a vital investment lesson. Sometimes it pays to back winners, even if others got there first.
This story originally appeared on Motley Fool
