Should You Sell Your Nvidia Shares?

Nvidia's stock performance this year has been nothing short of remarkable. But the big question remains: can its shares continue to rise?

A message from one of our members caught my attention. In essence, the member asked, "My investment in Nvidia (NASDAQ: NVDA) has grown from four digits to six digits. What should I do?"

This is a common question many investors face.

The Phenomenal Rise of Nvidia

Nvidia was one of our stock picks back in September 2018, before The Smart Investor was established. Since then, shares have surged over 1,850%, or more than 19 times their value, excluding dividends.

Currently, Nvidia is standing alongside some of the world's largest companies, like Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL). But in terms of stock performance, Nvidia is in a league of its own.

According to Barron’s, Nvidia's shares rose by a staggering 240% in 2023, far outpacing Microsoft's 58% year-on-year gain and Apple’s 49% increase. This trend continued into 2024, with Nvidia shares up over 120%.

For context, Nvidia has contributed almost a third of the S&P 500’s gain so far in 2024. This single stock has done the heavy lifting in an index that includes around 500 stocks.

The Business Behind the Boom

For the fiscal year ending January 31, 2024, Nvidia’s revenue soared by 126% year-on-year to $61 billion, while its free cash flow (FCF) jumped more than sevenfold to $27 billion. This year, analysts project revenue to reach $120 billion, with long-range projections suggesting $246 billion in sales by FY2029.

Despite trading at around $131 per share, Nvidia’s price-to-FCF (P/FCF) ratio is almost 83 times, significantly higher than Microsoft's 47.5 and Apple's 33. The question is whether Nvidia can justify this high valuation.

Nvidia has been central to the Generative AI (GenAI) boom, thanks to its graphics-processing units (GPUs) invented in 1999. GPUs are crucial for deep learning, an advanced AI technique that feeds machines vast amounts of data to help them learn by trial and error.

The Long Road to Success

Nvidia's current success is the result of years of innovation and strategic moves.

In 2006, Nvidia made its GPUs programmable through its CUDA (Compute Unified Device Architecture) platform, allowing third-party developers to build applications on its architecture. Today, over 4.7 million developers use CUDA and other Nvidia tools.

Nvidia has also introduced several advancements:

• NVLink in 2014 for better GPU connection.
• The acquisition of Mellanox in 2019, which brought InfiniBand architecture for high-performance computing.
• The Nvidia Grace CPU Superchip in 2022, its first ARM-based data center CPU.

So, Should You Sell?

In the short term, predicting Nvidia’s stock movement is challenging. A high P/FCF ratio means shares could fall if results disappoint or rise if the business continues to exceed expectations.

As investors, our focus should be on the long-term sustainability of Nvidia's competitive advantage. If Nvidia can maintain its edge, its shares should perform well over time.

However, it's important to remember why you invested in the first place. If your gains from Nvidia help you achieve your financial goals, consider it a success. The ultimate goal is to meet your personal financial objectives, not just to beat the market or outperform your peers.

Conclusion

Deciding whether to sell Nvidia shares depends on your individual financial goals and risk tolerance. Assess Nvidia’s long-term potential and consider your personal objectives to make an informed decision.