History says that great companies can become disappointing stocks. Is Nvidia next? – Business News (Trending Perfect)


Fear of missing out — also known as FOMO — can lead to shocking excesses on Wall Street. So-called bubbles can push stocks so high that you start to believe the sky is the limit. For now, it seems that way Nvidia (Nasdaq: NVDA) It can do no wrong, and its stock price has risen accordingly. However, if you pay attention to the history of Wall Street, you'll see that buying Nvidia today could easily end up being the wrong decision.

Nvidia's stock gains have been impressive

The big story with Nvidia is that they make high-powered chips that are capable artificial intelligence Applications (artificial intelligence). AI is a huge story today in the technology sector, as almost every company that can do this is either directly working on an AI product or explaining to investors how AI will be beneficial to them in some way (by increasing efficiency or automating tasks), for example. ). Wall Street is very fond of artificial intelligence and anything related to it.

A person on a motorcycle with a missile strapped to his back.A person on a motorcycle with a missile strapped to his back.

Image source: Getty Images.

Given Nvidia's direct connection to the space — and its growing profits from it — the stock has advanced rapidly. Over the past year alone, the stock has risen by 223%. Over the past three years, the gains are more than 550%. Over the past five years, its gains amounted to more than 1,860%.

NVDA chartNVDA chart

NVDA chart

Scan the 10-year price chart above, and Nvidia stock appears to be taking off like a rocket. The combination of this price rise and the general AI fever has investors clamoring to buy it. But don't jump on that rocket without looking at some Wall Street history.

Ben Graham's wisdom in the Depression era

Benjamin Graham is the man who helped with this Warren Buffett training And the author of the famous investment book The smart investor. To paraphrase the Wall Street giant, even a good company can be a bad investment if you pay too much for it. A great example of this is Cisco Systems (Nasdaq: Cisco). Take a look at the chart below.

Cisco diagramCisco diagram

Cisco diagram

It would be hard not to notice how similar its rocket-like trajectory is to Nvidia's graph above. But the main feature of this chart isn't actually the stock price — it's the dates. The chart ends with the last trading day in 1999. The following chart brings the story to the present, and should be more than enough to scare any investor currently involved in Nvidia.

Cisco diagramCisco diagram

Cisco diagram

Simply put, after that giant peak during the dot-com boom, there was a huge crash during the dot-com bust. And Cisco's stock price still hasn't recovered everything it lost. If you buy near the peak, you are still in the red with respect to your investment (not taking into account reinvestment of dividends).

You could say this is a cherry-picked example, and that's true. But there are no crystal balls on Wall Street, and no way to be certain that Nvidia will avoid a similar fate. In fact, although it now has a dominant position in AI-enabled chips, competitors are working hard to catch up. When they do, Nvidia may not be quite as special anymore, and investors will likely get angry with the stock. Wall Street history suggests that at some point, the surge in Nvidia stock prices will end, just as it has with so many other stocks before.

TSLA chartTSLA chart

TSLA chart

Don't forget gravity

Few companies can defy gravity forever. Tesla's (NASDAQ: Tesla) For example, shares are down about 50% since the electric car giant became sustainably profitable around 2020, and are down about 60% from the all-time highs they reached in late 2021. This may seem counterintuitive, but the stories Often more powerful on Wall. Street of profits. When the story gets old, high stock prices have a painful habit of crashing again.

Don't let FOMO get the better of you. Nvidia may be a great company, but it can still be a bad investment if you pay too much for it.

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Robin Gregg Brewer He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems, Nvidia, and Tesla. The Motley Fool has Disclosure policy.

History says that great companies can become disappointing stocks. Is Nvidia next? Originally published by The Motley Fool



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