Nvidia (NVDA 3.43%) has been one of the greatest growth stocks in recent history. Over the past decade, the chipmaker’s stock soared 28,610%. That rally would have turned a modest $1,000 investment into about $287,100.
Nvidia’s growth was initially driven by its brisk sales of gaming GPUs, which are also used in the professional visualization and cryptocurrency mining markets. But over the past few years, its sales of high-end data center GPUs for processing AI tasks eclipsed its sales of gaming GPUs and became the chipmaker’s core growth engine.
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From fiscal 2014 to fiscal 2024 (which ended in Jan. 2024), Nvidia’s revenue grew at a compound annual growth rate (CAGR) of 31% as its net income rose at a CAGR of 52%. From fiscal 2024 to fiscal 2027, analysts expect its revenue and net income to grow at a CAGR of 57% and 65%, respectively, as the AI market continues to expand.
Based on those expectations, Nvidia’s stock still looks reasonably valued at 34 times forward earnings. But before you start a big position in Nvidia, you should review these strategies which could help you maximize your long-term returns.
Understand Nvidia’s strengths and weaknesses
The bull thesis for Nvidia is easy to understand, but investors should recognize the longer-term challenges. Nvidia generated 88% of its revenue from its data center chips in its latest quarter, which makes it an all-in bet on the secular growth of the AI market. If that expansion slows down, Nvidia’s sales growth could abruptly stall out.
Nvidia could also face more competitors in the future. It accounted for 98% of all data center GPU shipments worldwide in 2023, according to TechInsights, but AMD (AMD 3.33%) could gradually gain more ground with its cheaper Instinct GPUs. Many of Nvidia’s top hyperscale data center customers -- including Microsoft (MSFT 1.06%), Amazon (AMZN 1.52%), and Alphabet’s (GOOG 2.50%) (GOOGL 2.65%) Google -- are also developing their own AI accelerator chips.
Tighter regulations for AI chips could also throttle its future growth. Its data center GPU sales to China are already being curbed by tighter export curbs, and it could face antitrust headwinds as it continues to monopolize the high-end data center market.
Use dollar-cost averaging to offset the volatility
Nvidia’s stock is already volatile, but those challenges could shake out a lot of investors with some steep drawdowns. To offset that volatility over the long term, investors should rely on dollar-cost averaging, or the practice of buying a set dollar amount of its stock at regular intervals regardless of the trading price.
For example, you can commit to investing $1,000 in Nvidia on the first trading day of every month. If its shares are trading lower, then you’ll buy more shares. If they’re trading higher, you’ll buy fewer shares. Over a stretch of multiple years, those purchases will dilute your overall risk and smooth out your long-term returns. That same strategy works well with other volatile investments like Bitcoin (BTC 2.67%).
Lock up your shares in an IRA
Many investors prematurely sold their shares of Nvidia over the past decade. After all, it seemed prudent to take some profits after its stock generated such massive gains. But patiently sticking with Nvidia and doing nothing would have been the smarter move.
As Warren Buffett’s mentor Benjamin Graham once said, the “investor's chief problem -- and even his worst enemy -- is likely to be himself." So to prevent yourself from becoming your own worst enemy and selling your shares of Nvidia too early, you should simply lock them up in a traditional or Roth IRA. If you’re under the age of 50, you can contribute up to $7,000 per year into both types of IRAs, but you can’t withdraw those funds without incurring penalties and taxes before the age of 59 1/2.
Therefore, contributing $7,000 per year to an IRA and using those funds to purchase shares of Nvidia on an annual basis will keep you on a disciplined path of dollar-cost averaging and prevent yourself from prematurely taking profits.
But don’t just set it and forget it
Investors should buy and hold Nvidia for the long term if they expect it to maintain its lead in the booming AI market. But they shouldn’t blindly stick with the stock and ignore its earnings reports and evolving market challenges. If those issues disrupt the bullish thesis, investors should still be ready to sell the stock to maximize their gains.
