I want to buy stock in the graphics processing company Nvidia, but I’m not sure where to start.
The share price has risen phenomenally in 2023, but have I missed the boat? Can it sustain this performance and is now still a good time to buy into Nvidia?
And should I try to buy shares directly or perhaps gain exposure to them through an ETF or investment trust, and which ones, if so?
Rapid Rise: The only way for Nvidia’s stock price to rise in 2023 is. But investors looking to buy now will wonder: can this continue?
Helen Kirrane from This is Money replies: California-based Nvidia certainly enjoyed a meteoric rise in 2023.
The company’s share price is up a whopping 230 percent in the past year, and 67 percent in the past six months alone.
Nvidia makes the computer chip systems that power much of the world’s AI computing applications. Demand for this has grown explosively in the past year.
The chipmaker, whose products already power video recommendations on TikTok and ad recommendations on Instagram and Facebook, is now seen as a force to be reckoned with in the AI space.
Nvidia has a Q4 2023 earnings update on February 21 – and this should give investors an idea of whether it’s still gaining momentum or running out of steam.
Investment experts say the most important question investors should consider is: what are Nvidia’s prospects in the future?
Can Nvidia’s great performance hold up?
Steve Clayton, head of equity funds at Hargreaves Lansdown, replies: ‘That really is the trillion dollar question. Can Nvidia continue its rapid expansion? At this point, Nvidia’s GPU-based technology has given the company an extremely large market share, but it’s not surprising that others are looking to catch up.
Rival chipmaker AMD is making big claims about the capabilities of its next-generation devices, arguing that it will soon have technological leadership in AI computing. But having the best designs is not enough.
“You need to be able to produce in huge quantities and this is where Nvidia appears to have the edge, with huge capacity committed by contract manufacturers like Taiwan Semi to deliver Nvidia’s designs at pace. Given that semiconductor factories cost billions and take years to build, this is not an easy obstacle for Nvidia’s rivals.”
Laith Khalaf, head of investment analysis at AJ Bell, replies: ‘It is certainly right to be cautious when it comes to an area that has seen so much hype recently and where share prices have risen so quickly. Technology is also an area where things can change very quickly. Not so long ago, Nokia was the market leader in mobile phone sales, but you don’t see many of its handsets these days.
“But today’s tech titans are so valuable and have so many resources at their disposal that it’s hard to see newcomers dethroning them.
“Maybe their biggest threats come from each other. The bull case for Nvidia is that by supplying the chips that power the AI revolution, it is akin to the traders selling pickaxes during the gold rush. The rapid rise in stock prices isn’t just the result of frothy sentiment either; there have been real, tangible profit improvements.
‘The current price-earnings ratio of the stock is 33 times greater than a year ago. This indicates that the share price gain over the past year is the result of a big jump in profit expectations.
‘Those predictions may be way off, but Nvidia seems to be pleasantly surprising so far. At 33 times forward earnings, Nvidia is certainly not cheap, but it is also not an outlier among the Magnificent Seven technology companies on the US stock market.
‘The premium valuations at which these companies trade mean that there is already a lot of good news in the price, and any misstep in delivering profit growth could be severely punished.’
Richard Hunter, head of markets at Interactive Investor, replies: ‘Such stratospheric increases in stock prices could come with a downside. The bar has now been raised, meaning the shares could be vulnerable to disappointment on subsequent upgrades as expectations have increased.
‘Volatility can also be expected, with the potential for sharp share price movements when the latest results are announced next week. Right now, however, US tech stocks in general are in a slump, with the Nasdaq index nearing an all-time high and up 17 percent in the past year.
‘Other potential concerns include heightened geopolitical tensions between the US and China, with both seemingly reluctant to sell their high technology products to each other, potentially reducing Nvidia’s sales.
“Furthermore, questions remain about the appropriate valuation of technology, while the concerns of many governments around the world about the potential power of AI and its impact on human society warrant deep consideration.”
How to buy stocks
Helen Kirrane replies: ‘You can own Nvidia stock directly or through an exchange-traded fund (ETF), an investment trust or fund.
‘If you want to buy Nvidia shares directly, you will need to find an investment platform, such as Hargreaves Lansdown or Freetrade, that will give you access to the Nasdaq stock exchange where it is listed. You can buy Nvidia shares through an Isa, Sipp or general investment account, and almost every broker trades online.
‘Whether you should buy shares immediately depends on the rest of your investment portfolio and your level of experience.
“If this is your first investment, you may not want to put all the hard-earned money you’ve set aside into just one stock.”
‘Nvidia is included in several stock market indices, including the S&P 500 and Nasdaq Composite Index. As a result, index funds and ETFs that compare their returns to those indices hold Nvidia stock.
‘There are a number of specialist thematic ETFs that provide exposure to Nvidia, such as the VanEck Semiconductor UCITS ETF, For example. It is highly concentrated, with the top ten investments making up three-quarters of the fund, and at 0.35 percent per year it is more expensive than regular ETFs, so only for experienced investors with a high risk tolerance.”
Steve Clayton replies: ‘Buying direct means that every dollar you invest gives you exposure. The downside of that, of course, is that you’re only riding one horse, and emerging technologies are rarely risk-free investments, to say the least.
“Nvidia will only be a relatively modest part of any fund or ETF you’re likely to come across. But if you choose the latter route, you could be introduced to a whole host of other technology names, many of which will also benefit from AI’s early growth to some extent.
‘It seems unlikely that demand for technology as a whole will disappear any time soon, as the world is still digitizing at a rapid pace. The usual mantra in the investment world is always to try to diversify your investments. Why should the approach to investing in artificial intelligence be different?’
Laith Khalaf replies: ‘Whether you invest in Nvidia directly or through an ETF depends on the rest of your portfolio. Direct investing should only be considered if you already have a well-diversified portfolio.
‘I don’t recommend putting much more than 5 percent of your total portfolio into any one individual stock name, to give you an idea of appropriate levels of diversification.
Nvidia’s share price has almost tripled in the past twelve months
“You also need to consider the exposure to Nvidia that is already in your portfolio through the funds you hold. If you don’t have enough diversification in your portfolio to support an outright purchase, you can gain exposure through an index tracker like the iShares Core S&P 500 ETF which follows the US market and has a 3 to 4 percent position in Nvidia, or the Fidelity Index Global Fund which tracks the global developed stock market and has an exposure of around 2 percent, although their fortunes will clearly be determined more by broader stock market movements than by Nvidia alone.
‘To increase your exposure to Nvidia, you could consider a combined approach, where you buy a diversified fund in addition to the individual stocks.
‘However you decide to invest, it’s worth thinking about injecting your money into the market so that you equalize the entry price over a period of time. Also consider investing in an Isa wrapper to protect future capital gains and tax income.”
Richard Hunter replies: ‘If you are a more cautious investor, you may prefer some exposure to AI without putting all your eggs in one basket.
‘There are a number of specialist technology investment trusts available that spread the risk across many holdings, or even a technology tracker (including ETFs) that does much the same thing but on a passive basis.
“In terms of the interactive investor ratings list, exposure to Nvidia is possible through eg Scottish mortgage, Brown Advisory American sustainable growth fund And GQG Partners Global Equity Fund.’
Tom Lee, head of trading at Hargreaves Lansdown replies: ‘Because this is a foreign stock, there is a currency conversion fee and transaction fee of £11.95 in the case of Hargreaves Lansdown, and up to 1 percent on the conversion.
‘For US shares, clients must also complete a W8-Ben form before trading, which reduces tax on any dividends, and this can be done online.’
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