Money Rehab with Nicole Lapin - Nvidia is the Hottest Stock Right Now— But Should You Invest?

Episode Date: March 7, 2024

Nvidia is the hottest thing on Wall Street right now— but is now a good time to buy? If you haven't invested, have you missed your chance? Nicole explains how the pros are answering that question, what Nvidia actually does and how to benefit from this magic stock.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. The big story that's been dominating news on Wall Street for months now can be summed up in one word, NVIDIA. I don't know if I can even remember the last time I opened up CNBC or the Wall Street Journal and didn't see a headline about the tech darling. And it is living up to the hype. If you invested $1,000 in NVIDIA

just five years ago when the price was around $37 a pop, you'd have turned your investment into over $21,000. As we know, the best investing advice that we have is to buy low and sell high. And you certainly don't want to do the opposite, buying high and selling low. That is a surefire way to lose money. So investors are now wondering, is it still a good idea to buy NVIDIA or is this the high? Today, I'm going to explain how experts are answering that very question, what the heck NVIDIA actually does and how to benefit from this magical stock. NVIDIA was founded in 1993 and its original claim to fame was creating really cutting edge graphics processing units or GPUs. You may have heard that NVIDIA is a chip manufacturer. These GPUs are actually what

folks are referring to when they're talking about NVIDIA's chips. Now NVIDIA Tech has supported all of the big video game players out there. Roblox, Halo, Fortnite, Call of Duty, Grand Theft Auto, every other video game that I can't even think of right now. I had to dig deep for those because I'm not a super big video game girly. Cut to present day. NVIDIA has evolved far beyond these gaming roots. Today, it's at the forefront of AI and cryptocurrency mining, with its technology driving innovations in cars, robotics, and so much more. Plus, its technology is in diverse markets, yes, including gaming, but also data centers, professional visualization, and automotive, which has really protected Nvidia against

fluctuations in any one market. Nvidia's value has exploded over the last year. In the last 12 months, the value of the company is up 265%. In late February, the company released its earnings report for the last fiscal quarter, which was Q4 of 2023. This earnings report had been highly anticipated by the investing community. As we know, earnings season is a period where a company's stock price can be really volatile and complicated. The stock market moves in part based on expectations of future earnings of any given company. And that expectations part is really important. I remember last year, Delta released its earnings report that detailed how they met their financial

expectations for the quarter. Great news, right? We would expect the stock to go up. But financial analysts had predicted that Delta would beat expectations. And when Delta announced that it just met expectations and didn't exceed expectations, Delta's stock price actually went down, even though the company had nothing but good news to share. So analysts were uncertain about how this earnings call would go for NVIDIA. The company has been on the up and up for the last few years, which is hard to sustain. Companies can expect to have 200% growth every single year. So if Nvidia signaled that its growth would be slowing down for 2024, for example, the stock price could have fallen.

But it didn't. Nvidia announced a record quarterly revenue of $22.1 billion. This growth is underpinned by its data center revenue, which alone jumped $18 billion. Overall, the company's revenue for the fiscal year climbed by 126%, driven by the booming demand for accelerated computing and generative AI across various sectors. At the time I'm recording this, NVIDIA's stock price is $859, which is really close to its 52-week high price of $876. The natural question for investors now is, should I invest? Are we reaching a peak for Nvidia? And therefore, is it too late to get in on the stock? Or is this Microsoft of the early

2000s and Nvidia's growth story is just beginning. In order to answer these questions, pro investors look at a bunch of different variables that fall into two categories – technical analysis and fundamental analysis. Technical analysis is the study of past market data – primarily price and volume – to forecast future price movements. Fans of this type of analysis believe that history tends to repeat itself and that market trends can be predicted through careful examination of charts and other technical indicators. Fundamental analysis is based on data not from charts, but from financial statements, industry trends, and economic indicators. One of the cornerstone metrics of fundamental analysis

is a company's price-to-earnings, or P-E, ratio. The P-E ratio is a company's price to earnings or P.E. ratio. The P.E. ratio compares a company's current share price to its per share earnings. In other words, it tells how much investors are willing to pay for every dollar of earnings. And removing yet another layer of jargon, a P.E. ratio is a metric that investors use to gauge the value and growth potential of a company. In the most general terms possible, investors tend to think of stocks with a low P.E. ratio as value stocks and stocks with a high P.E. ratio as growth stocks. I'll give you a few examples. Verizon, JP Morgan, and Goldman Sachs are all considered value stocks. At the time I'm recording this, Verizon's P.E. ratio is 14, J.P. Morgan's is 11, Goldman Sachs is 17. In contrast, Amazon, Tesla, and Netflix

are all considered growth stocks. At the time I'm recording this, Amazon's P.E. ratio is 60, Tesla's is 42, and Netflix's is just about 50. What the heck does all of this mean? Well, if the price to earnings ratio is high, that means a stock price is high relative to how much profit a company is making. But here's the thing. Low profit, even zero profit, isn't always a bad thing. Does it go against everything you've ever known about business? Maybe. But there are two reasons a company might not be profitable. First, they suck and they're not making any money. That's what we may have assumed. But there's a second reason. The second reason a company might not be profitable is because they're taking all of the money that they're making and putting it back into the

company. A company that is pouring money back into its operations can be a sign of a growing company. For example, maybe all of the company's revenue is going straight to brand new technology that everyone is going to want to have. I would invest in that stock, wouldn't you? An important thing to remember about growth stocks, though, is that investors are typically actively looking for evidence that a growing stock really is going to prove its worth or on the flip side, if it's going to go bust. With these companies, investors are essentially paying a premium based on the hope

that the stock will be more profitable later on. And it is always risky to try and predict what a company will be or do in the future. One sign investors look for is whether growth companies are reporting increasing profit year over year, which would mean the P.E. ratio would get smaller and smaller. If investors don't see this change, they might reevaluate whether the company is a good candidate for growth stock. And if they get cold feet, they might cash out their shares in the stock. Because of the laws of supply and demand, the more shares being put back on the open market means the stock price will fall. In other words, if a bunch of investors start cashing out their stocks, the stock price will plummet. NVIDIA's PE ratio is 70.78, which is pretty high and definitely

puts it in the growth stock category and therefore the risky category. So like any other investing decision, we're going to have to weigh the risks and the rewards. Let's take a look at three promising variables of the company. In the pro column, we have an innovative leadership team. The president and CEO of Nvidia Corp, Jensen Huang, is considered a visionary and one capable of keeping Nvidia firmly in its position as leader of the pack when it comes to AI and accelerated computing.

Also in the pro column is Nvidia's gangbusters financial performance. Record-breaking revenue and earnings demonstrate Nvidia's strong market position and growth trajectory. Lastly, we have Nvidia's diverse revenue streams. Nvidia's operations touch many industries like gaming, data centers, and AI, and that diversification might insulate the company against sector-specific downturns. Now let's take a look at some cons. Not only does NVIDIA's high PE ratio imply risk, a high PE ratio also in some cases means that the stock is overvalued, meaning investors are

paying too much money to invest in a company relative to how profitable the company actually is. If Nvidia is overvalued, it's possible that there will be an inflection point when the company doesn't meet market expectations, like the Delta example I talked about earlier. In that case, the stock price would drop. Bad news for investors. Another con, market volatility. Even though NVIDIA is used in diverse industries, it still sits pretty squarely in the tech sector, which makes the company susceptible to broader market shifts and tech-specific regulations. When interest rates go up, for example, the tech industry as a whole tends to suffer. After recent data shows

inflation isn't cooling as much as we thought, economists are now wondering if J-POW is really going to be able to lower interest rates this year. If he can't, or if interest rates go up again, tech stocks might be affected for the worse. And lastly, Nvidia is subject to geopolitical conflict between Taiwan, where its chips are made, and China. Tensions between China and Taiwan have been fraught for hundreds of years, but recently there have been heightened fears of a Chinese invasion of Taiwan. If that were to happen, NVIDIA manufacturing would certainly suffer. As investors, our job is to weigh these pros and cons based on the best information we

can find. But there is a way to take the pressure off calling the right shots, which leads me to today's tip you can take straight to the bank. If you want to invest in NVIDIA, but you don't want to make a big bet and put all of your eggs in that one basket, you can invest in S&P 500 index funds that track the market. Because those funds do have exposure to NVIDIA. One popular S&P 500 index fund, for example, has the ticker VOO. VOO is made up of about 4% of Nvidia, which means VOO will feel some of the love if Nvidia's stock price continues to climb. But it's protected in case Nvidia's 2024 doesn't shine as brightly

as it did in 2023. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you.

No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.