The amount of questions about Nvidia I’ve been getting recently is astonishing.
Well, maybe it isn’t astonishing.
For those who may be unfamiliar, founded in 1993, Nvidia is a technology company that manufactures computer graphics processing units (GPUs) and is leading innovation in the A.I. technology space. Nvidia is the current poster child for the A.I. revolution that’s supposedly upon us.
People are always in search of the next big thing, and Nvidia is where a lot of eyes are focused.
And not without reason. Nvidia’s revenue more than doubled in its most recent fiscal year, and it has an operating margin of 61%. The company has generated $26.9 billion in free cash flow in 2024; that number is up 7x from 2023.
Because of this massive growth, Nvidia’s stock has skyrocketed over the past few years.
As I’m writing this, Nvidia stock is up 158% since January. The stock has grown 197% since this date last year.
From 2004 to 2019, Nvidia stock had a total return of 1,838%. Since the beginning of 2019, Nvidia has earned a total return of 3,011%.
A thousand dollars invested in Nvidia stock in 2019 would be worth $30,110 today.
Of course, this 5-year journey hasn’t been without its ups and downs. Achieving that massive return would have required you to sit through a year-long 66% decline starting in November of 2021.
But overall, the growth of Nvidia has been wild.
In 2019, Nvidia was outside the top 60 largest companies in the S&P 500. Three years ago, it had just barely cracked the top 10 list of names. Today, Nvidia is neck and neck with Apple and Microsoft as the largest stock in the world.
If you own an S&P 500 index fund these three companies alone likely make up over 20% of your portfolio.
So with these insane returns, should everyone pile all of their extra cash into Nvidia stock? Is this performance sustainable?
I don’t know. And neither does anyone else.
But as with most stock market questions, we can look at the past to give us an idea of how markets work and what to expect going forward.
Dimensional has an awesome chart that looks at the annualized outperformance of companies before and after they make it into the top 10 biggest stocks:
As you can see, history tells us that once you become one of the top 10 biggest stocks it’s likely you’ll underperform the overall market moving forward.
Despite what’s happened over the past five years or so in the U.S. stock market, it’s actually uncommon for the biggest stocks in the S&P 500 to outperform the index.
The best time to buy a company is before it becomes one of the biggest stocks in the world. Crazy investment returns come from the journey to the top 10.
As Warren Buffett once said, “Size is the enemy of outperformance.”
Now, could you argue that we’re in a new era of massive technology companies that will continue to grow larger and more powerful? That this time, with these companies, it’s different?
Sure. Nvidia has already defied many people’s expectations. The world and the stock market are changing constantly. Who knows what the future will hold?
I’d simply remind you of a quote from investment pioneer John Templeton:
“The four most dangerous words in investing are: ‘this time it’s different.’
Thanks for reading!
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.