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1 Reason To Avoid Nvidia

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

Doing both will help you earn higher than average investment returns and build your wealth.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your capital is to keep investing well over time… Combine this with dividends and you’re well on your way to building a retirement account you can live off.

And this is a huge part of things.

But another huge part of this is losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

But most only think of investing well. 

Today, I want to show you 1 Reason To Avoid Nvidia so you can continue building your wealth safely.

1 Reason To Avoid The 13th Largest Stock In The World

It’s Enormously Overvalued

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.

But frankly none of those matter with Nvidia (NVDA) due to its huge valuation.

Nvidia is the world’s leading designer of graphics processing units (GPU’s).  These are the things that show up as graphics, pictures, videos on computers, phones, and even car entertainment centers.

Due to the rapid increase in the need for ever better graphics in the last decade as the internet and smart phones evolved, its revenues exploded…  From $3.5 billion in 2010 to $13.1 billion in the last twelve months.

This is an increase of 2.7X in the last 10 years.

Which led to huge increases in profits and cash flows in this time.

Its net income rose from $253 million in 2010 to $3.4 billion in the last 12 months.  This is a 12.4X increase in the last 10 years.

And its free cash flow rose from $578 million in 2010 to $5 billion in the last 12 months.  This is a 7.7X increase in the last 10 years.

This exponential growth in revenues, profits, and cash flows helped skyrocket Nvidia shares in this time.

From $18.68 per share at the beginning of 2010 to $558.24 per share as of this writing.

This is an increase of 28.9X or 2890%.

The growth in its share price now makes it the 13th largest company in the world based on market cap.

You’re doing well if you earn 10% investment returns per year on the stocks you own.  Nvidia produced investment returns of 289% per year on average over the last decade.

Its growth should continue as the need for videos and graphics continue to increase over time. Which is illustrated with Nvidia’s continued growth in revenues, profits, and cash flows even during this pandemic.

This is all great for Nvidia and its shareholders… But it also leads to a huge problem.

It’s massively overvalued.

Its P/E is 100.8.

Its P/CF is 61.2.

And its forward P/E is 51.3.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

Nvidia crushes this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have better chances of earning higher returns owning its stock over time.  These combined make the stock a less risky investment.

With Nvidia stock being so overvalued it means there is no margin of safety… That you have a far lower likelihood of making money owning its stock over time.  And these make the stock riskier.

Does this mean I think Nvidia stock will crash and burn?

No.  I expect it to continue performing well going forward… But not as well as it did in the past due to its large valuation.

For the reason of its overvaluation I recommend you avoid its stock… There are safer, cheaper, and higher return stocks you can buy now.

Use the following links to our recent articles to see some of these stocks. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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