If I had bought shares in Nvidia (NASDAQ: NVDA) just over a month ago, I would already have seen them jump 40% in value. But while I have missed out on that share price surge, what about the longer-term picture? Could now be a good time for me to start adding Nvidia stock to my portfolio?
Share price movements
First it helps to consider why the price has gone up so much in a matter of weeks. I think this partly reflects investors piling back into the US tech company after it had fallen a long way, hoping that shares had hit the bottom. Even after the recent increase, Nvidia is still 45% below where it stood a year ago.
Yesterday, the company announced its third quarter results and they did not impress me. Revenue was down sharply, falling 17% compared to the same quarter last year. Even worse, net income crashed 72% on the same timeframe.
The weak performance reflects a number of challenges the chipmaker has been facing, such as a huge fall in demand from gamers compared to the lockdown period and a rebalancing of inventories pushing down selling prices for graphics cards.
What comes next?
The bounce in the stock suggests that many investors may feel that the worse is now behind. After all, on a price-to-earnings ratio of over 50, it looks to be priced for a glittering future.
Is there more bad news to come though? I think there may be. The sort of volatility we have seen in Nvidia’s share price reflects factors largely outside the company’s control, such as demand swings and global supply chain issues.
Recently, the business has been on the back foot and I see a risk that that could continue. Supply chain imbalances have been the norm not the exception in many sectors, including computer chips, over the past several years. I am not confident that is about to go away as an issue altogether.
Despite my misgivings about the prospects for short-term business performance, as a believer in long-term investing, I am more interested in the bigger picture.
Nvidia is a business that has a lot going for it in this regard. Over time, I think demand for chips is only likely to grow. It is a specialised industry with high barriers to entry. It has proprietary technology and an established capability in research and development. It also benefits from an established customer base. Over the long term, I think these things can help the business perform well.
However, while I like the business I do not find the price of Nvidia stock right now very attractive.
The company’s market capitalisation is almost $400bn. That strikes me as pricy for a company that even in its best years had never reached $10bn in income. Earnings may grow, but the latest results do not fill me with confidence in that regard, so I prefer to wait and see what happens in coming years. For now, I will not be buying the shares for my portfolio.
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022