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Is Nvidia Stock a Solid Long Term Investment?

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Short-term investments can be very profitable. However, they require a lot of work. After all, short-term investments are considered to be short-term investments because interested individuals won't be holding on to them for very long, meaning that there are more transactions involved in the matter. Certainly, interested individuals can make it easier for themselves by putting less effort into preparing for each transaction. In practice, that is a terrible idea because it is just as easy to lose money on short-term investments as it is to lose money on long-term investments. If anything, it is even easier because of two factors. One, short-term investments tend to have thin profit margins even under the best of circumstances. Two, more transactions mean more transaction costs. As such, it is no wonder that so many people prefer long-term investments. They can't make money off of short-term changes in value. However, these people can put more effort into preparing for each transaction while making use of a wider range of resources than otherwise possible. In part, this is because it is much easier to find information about the factors that can influence something's long-term value than about the factors that can influence that same thing's short-term value. Having said that, it should be remembered that the amount of time that is available to interested individuals can be very important as well. Simply put, having hours, days, or even weeks to study a potential investment is much better than having mere days, hours, or even minutes for the same. Of course, if people choose to make long-term investments, they should make sure to thoroughly research Nvidia as well as other potential candidates.

What Is Nvidia?

For those who are unfamiliar, Nvidia tends to be best-known as a chipmaker. However, that term can be a bit misleading. Nvidia is indeed a chip company. The issue is that chip companies have undergone a huge divergence when it comes to their business model. Some chip companies have chosen to de-emphasize their chip manufacturing capabilities in preference for focusing on chip R&D as well as chip design. Something that has proven to be very popular because maintaining cutting-edge chip manufacturing capabilities requires a huge amount of expertise, experience, equipment, and other expensive resources. In contrast, other chip companies have chosen to either retain some of their chip manufacturing capabilities or even lean into their chip manufacturing capabilities. Nvidia is very much an example of the former rather than the latter. As a result, interested individuals shouldn't mistake it for being the same kind of chip company as, say, Taiwan Semiconductor, which is very much an example of the latter. In fact, the two chip companies have a very good working relationship with one another because Nvidia is reliant on Taiwan Semiconductor to make a lot of its chips.

Of course, there is much more that can be said about Nvidia's revenue-earning operations. For starters, this is the chip company that started up the concept of the GPU, which would be a specialized chip for creating images that has since managed to find other uses in other contexts because of the way that it works. This is because Nvidia's GeForce 256 was the first chip to be marketed as a GPU. Since then, the chip company has continued making GPUs, with the result that they make up the bulk of its revenues in the present time. For context, Nvidia is focused on five markets for the most part, which would be gaming, data center, professional visualization, automotive, as well as OEM and other. Gaming was the single most important market at 45 percent of total revenue for Q3 of the chip company's 2022 fiscal year. However, data center wasn't too far behind at 41 percent of total revenue over the same period of time. After which, it was professional visualization at 8 percent of total revenue, automotive at 2 percent of total revenue, and OEM and other at 3 percent of total revenue. Based on this, it should be clear that GPUs remain Nvidia's single most important kind of product, though the chip company has other products and services as well. To name an example, it has a game streaming service called GeForce NOW. Similarly, it is involved in AI as well as various kinds of chips for various kinds of products.

Besides this, it is useful to say something about Nvidia's original plan of buying a UK-based company called Arm Ltd. from SoftBank Group for $40 billion. The purchase would have done a great deal to strengthen the chip company's position because Arm Ltd. is a semiconductor and software company specializing in AI. In particular, it is worth mentioning that said company licensed technologies to Nvidia's competitors, so it isn't hard to see how that could have been used against the latter. As such, this caused regulators in the United States, the United Kingdom, and other countries to put up opposition to the acquisition. Something that caused it to fall through because even if Nvidia and SoftBank Group managed to make it through every single regulatory hurdle that could be put before them, the sale wouldn't happen until it was long past the original schedule for the whole process.

Not a Lot of Competitors

Nvidia has competitors. One example would be AMD. Another example would be Intel. However, Nvidia doesn't have a lot of true competitors because it is on the cutting edge of its chosen field. Something that companies can't reach without a huge amount of time, effort, and other resources, particularly since everything is continuing to progress at remarkable speeds. There are chip companies out there that are playing catch up, but even so, it seems safe to say that Nvidia will remain on the cutting edge of its chosen field in the near future barring something truly unexpected.

High Demand For Its Products

A lot of chip companies have benefited from the high demand for their products in recent times. After all, chips are seeing use in more and more products, meaning that chips have become more and more important. However, some chip companies have benefited more than others, as shown by how Nvidia has benefited from the huge upswing in demand for GPUs because of cryptocurrency miners. Essentially, GPUs are good for creating images, but the way that they work means that they are also good for solving the problems that result in the creation of cryptocurrency. Since cryptocurrencies have become very valuable, there have been a lot of people buying GPUs for the purpose of setting up cryptocurrency mining rigs, so much so that they have been known to price other consumers out of the market for GPUs. That is a huge issue for those consumers as well as the environment, but Nvidia's position as a maker of GPUs means that it can continue to benefit from said trend.

Even Higher Demand For Its Products Expected in the Future

There is good reason to believe that the demand for chips will continue to increase in the future because there is a general trend of electronics becoming more and more capable. In recent times, there has been a fair amount of interest in the Metaverse as well, which is a very marketing-friendly way of referring to 3D virtual worlds that will put a strong emphasis on social connection. There is no real way to tell whether this will work out or not, particularly since the hype makes it even harder to predict the future than under normal circumstances. Still, if the Metaverse actually manages to take off, it seems safe to say that Nvidia will play an important role in it.

Good Performance

Nvidia's performance hasn't been consistently excellent over time. However, it is no exaggeration to say that it has managed to do quite well on the whole. Over the last decade, it has seen a couple of years in which its revenues fell. However, it has also seen four years in which its revenues rose by more than 20 percent. Combined with everything else, this meant that Nvidia increased its revenues at a compounded annual rate of 16.8 percent, which is more than respectable. Thanks to this, it isn't unreasonable to think that Nvidia could continue performing well in the times to come. Something that tends to be very attractive for people who are looking for a long-term investment.

Demand For Its Products Isn't 100 Percent Reliable

For starters, the demand for Nvidia's products isn't 100 percent reliable. Cryptocurrency is notorious for being very volatile. As a result, it wasn't that long ago when Nvidia took a hit because it predicted the cryptocurrency miners' demand for its products wrong for 2018. A fall in the value of cryptocurrency meant that there was a sudden decrease of interest in cryptocurrency mining. Thanks to that, Nvidia was stuck with a lot of very expensive inventory without enough cryptocurrency miners to snap them up. Even worse, a lot of cryptocurrency miners chose to offload their somewhat used GPUs, which further disincentivized other consumers from buying Nvidia's products. It isn't exactly hard to imagine something similar happening again in the future, particularly since cryptocurrency remains as volatile as ever.

Fabless Chip Company

Nvidia is a fabless chip company. This is good in the sense that it has enabled the chip company to streamline its revenue-earning operations. Unfortunately, it is also an issue because it means that Nvidia is very reliant on other companies. In particular, a wide range of parties have expressed concern over Taiwan Semiconductor because of Taiwan's de facto but not de jure independence, which has received extra focus in recent years because of U.S.-China tensions. Fortunately, neither China nor Taiwan shows much interest in changing the current status quo because that is pretty much guaranteed to turn into an international crisis or worse. Still, it is a real concern, even if it is one shared by a lot of other chip companies.

Might Be a Bit Overvalued At the Moment

It is perfectly possible for people to make an overvalued purchase when they go for a long-term investment. Nvidia has seen something like a 7,400 percent increase in its stock price over the last decade. In considerable part, this is reflective of its excellent performance over the same period of time. However, it is important to note that Nvidia is also trading close to its height when examined using metrics such as price to sales and price to earnings. As such, it is possible that its stock price is a bit too high, meaning that interested individuals might want to wait until it has fallen somewhat before looking into it once more.

Should You Invest in Nvidia?

Different people can make long-term investments for very different reasons. Sometimes, they might be interested in what they believe will be a huge appreciation in its value, which won't be realized until they choose to sell at some point down the road. Other times, they might be more interested in collecting regular payments from their long-term investments, which is common when those happen to be consistent dividend-payers. Ultimately, interested individuals are the ones in the best position to understand what they want. Something that determines what kinds of long-term investments they should go for. Certainly, they shouldn't hesitate to seek out professional advice while carrying out research of their own because expertise and experience can have a positive effect on their results. However, they should always have a clear idea of what they want, what they are investing in, and why those investments are well-suited for what they want.

Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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