It’s no secret Nvidia (Nasdaq: NVDA) 2023 has been one of the strongest years for any stock on the market. With several companies ramping up their purchases of class-leading graphics processing units (GPUs) for artificial intelligence (AI) development, Nvidia’s revenue has soared. This boom is far from over, and the stock has already responded with an incredible sales jump.
In 2023, the stock is up nearly 240%. That’s a great return, but what would have happened if you had held on to Nvidia a little longer than that – say, starting in 2020? Well, the results and lessons learned may surprise you.
A $10,000 investment has had some ups and downs
The first thing to understand about Nvidia’s business is that it is cyclical. Its GPUs are used to run heavy-duty workloads such as gaming graphics, engineering simulations, drug discovery, cryptocurrency mining, and creating AI models. Business thrives when consumers are flush with cash and companies are willing to invest in their computing capabilities.
Before the AI gold rush, Nvidia’s previous boom was driven by cryptocurrency miners. Since GPUs are used in cryptocurrency mining, many people have purchased thousands of the company’s chips to perform the task. This has led to higher sales in 2018 and 2021.
But the problem with boom periods is that they are usually followed by recession, which is exactly what happened with Nvidia.
When the cryptocurrency market collapsed in 2019 and 2022, demand for GPUs evaporated, causing the company to record several consecutive quarters of declining revenue. Before the AI competition took off, Nvidia was still dealing with declining GPU sales, but the boost provided by AI quickly turned its fortunes around.
So, if you looked at how much money you would have made by investing $10,000 in Nvidia at the beginning of 2020, you would have experienced quite the rollercoaster ride.
In late 2021 (at the peak of the market for many tech and cryptocurrency stocks), Nvidia turned a $10,000 investment into over $50,000. But this number dropped to about $20,000 in just a few months. In 2023, the AI dramatically increased the stock’s value, turning the original $10,000 into an incredible $82,000.
Nvidia’s historical cyclicality is a factor investors should consider
There are two important lessons about Nvidia stock that this hypothetical exercise offers:
-
It is a cyclical company. Most of its sales are non-subscription based, so its currently impressive revenue may not seem so amazing by next year. As a result, investors need to consider how much demand the AI market can support. Once this threshold is reached, expect sales to decline, which could send the stock crashing.
-
You should buy companies and hold them for the long term. Many investors likely sold Nvidia stock in 2022 when it collapsed. While they were still up on the price of their 2020 investment, it’s not as if they had just held the stock through tough times.
So what should investors do with Nvidia stock now? In my opinion, if you don’t own any Nvidia stock right now, it may not be a good time to establish a position due to its high valuation.
However, this could be a bad decision if the market for Nvidia GPUs is much larger than I expect. So, taking a smaller position (no more than 1% of your portfolio) may not be a bad idea.
If you’ve been holding Nvidia stock for a long time, it’s likely a large portion of your portfolio will be due to its recent performance. Making some gains here is wise, as stocks are highly valued and still cyclical (as many investors may forget).
Nvidia stock has gone through a few boom and bust cycles. I don’t know when the next bankruptcy will come, but I think it’s wise to prepare if it happens soon.
Should you invest $1,000 in Nvidia now?
Before you buy shares in Nvidia, consider the following:
the Motley Fool stock advisor The analyst team has just defined what they think it is Top 10 stocks Let investors buy it now… and Nvidia wasn’t one of them. The 10 stocks that were discounted could deliver huge returns in the coming years.
Stock advisor It provides investors with an easy-to-follow blueprint for success, including guidance on portfolio construction, regular updates from analysts, and two new stock picks each month. the Stock advisor The service has more than tripled the return of the S&P 500 since 2002*.
See 10 stocks
*Stock Advisor returns as of December 18, 2023
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
If You Invested $10,000 In Nvidia In 2020, This Is How Much You’d Have Today Originally published by The Motley Fool