Is it time to invest in Nvidia?

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There are three regrets in my life:

Not writing online in my twenties

Not studying Warren Buffett letters earlier, and

Not being able to get my hands on Taylor Swift’s concert tickets

But not investing in Nvidia is not one of them.

Why?

Investment, by its nature, is a forward-looking endeavor. Investing requires a vision of the future—not absolute certainty, but a well-founded belief in the likelihood of a business’s success and a reasonable estimate of whether today’s price will produce a decent return in the future.

Consider Warren Buffett’s rationale behind allocating a significant 37% of Berkshire Hathaway’s equity portfolio to Coca-Cola in the late 1980s, despite its ‘expensive’ P/E of 18x multiple by his usual standards. His conviction wasn’t rooted in Coca-Cola’s growth or innovative breakthroughs, despite the marketing narratives around its ‘secret recipe.’ Instead, Buffett was convinced of the timeless appeal of Coca-Cola, confident in its enduring consumption.

It’s because Buffett was able to predict with high certainty that people would continue to drink Coca Cola long into the future.

Buffett’s decision to avoid the dotcom frenzy despite widespread criticism illustrates his disciplined investment approach. His reluctance stems from his awareness that he isn’t familiar enough with fast changing technology to make accurate predictions about their future. This level of awareness and humility is a trait I admire.

Buffett knew where his strength was, and played within those circles. Likewise, I don’t know enough about Nvidia to have a reasonable guess about its future.

What I know about Nvidia

I do know that Nvidia stands at the forefront of the AI revolution with a ton of capital chasing this sector, or in other words, competition. On top of existing players like AMD and Intel, all of Nvidia’s major customers including Alphabet, Amazon, Meta and Microsoft are all designing their own A.I. chips, racing to cut into Nvidia’s dominant share of the market.

In addition, Nvidia’s revenue increased 265% to US$22.1 billion, which is unprecedented for a company of this size. Operating margins were also up a crazy 4,082 basis points to 61.2%, and free cash flow was up 2,206 basis points to 50.7%.

Nvidia’s GPUs are among the key beneficiaries of the shift towards accelerated computing and generative AI, thanks to AI-driven demand.

What I don’t know about Nvidia

But what I don’t know (yet) is whether its competitors are able to claw at Nvidia’s competitive advantage. The competitive landscape is rapidly evolving, with significant capital being deployed to rival Nvidia’s offerings.

AI is clearly revolutionary but I’m not sure how long the growth can last, whether its current peak profitability can be sustained and whether they can grow into their valuation.

What does Nvidia’s valuation demand?

Based on today’s market cap of US$1.94 trillion, for an investor to achieve a 10% annualized return over the next five years, the company market cap will have to hit US$3.12 trillion. So let’s work backwards from here.

Projecting forward, assuming a lofty 35x price to FCF multiple in five years, Nvidia’s FCF would need to reach US$89 billion, marking a 331% increase from its current FCF of US$26.9 billion.

This implies revenue of US$223 billion, a 365% rise from today’s revenue of US$60.9 billion in five years, to maintain a 40% FCF margin—a benchmark only a handful of tech giants could achieve and hold on to.

The level of growth required for a 10% annualized return on investment is unprecedented for a company of this size.

Are these wild numbers for a company of this size to achieve? Absolutely.

Could it be possible? Perhaps.

Do I know enough to invest in it? No.

And I’m fine with it.

It’s important to acknowledge one’s investment limitations. It’s wise to know what’s within your circle of competence and to abstain if it’s unclear. Chasing gains in unfamiliar territory can lead to perilous outcomes. I simply move this into my ‘too hard’ pile and move on to the next idea.

It’s a reminder that in investing, as in life, understanding our boundaries is as important as recognizing opportunities.

Speak soon, and invest wisely,

Thomas

P.S.

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