Nvidia’s $5T valuation may be a risk to your portfolio
Last Wednesday, Nvidia became the first publicly traded company to pass the $5 Trillion Market Capitalization, reviving concerns about the high valuation of the stock amid the growing AI bubble.
The country’s success comes from behind The chip designer joined Microsoft and Apple as publicly traded companies with $3 Trillion Market CAPS this past June. Then on July 9, Nvidia became the first $4 trillion Market Cap company.
Now, just four months later, the semiconductor manufacturer has launched the RERILLION Market Cap Club. That momentum is fueled by the rapid adoption of AI and came ahead of the company’s earnings report on Wednesday, November 19, which would have sent its shares higher.
For investors with exposure to NVIDIA – through direct payment ownership or market capitalization (eTFS) – News of record-setting valuations in the company raises concerns about the risk of torture.
To put the $5 trillion in context
Nvidia has seen its stock gain more than 45% this year, and over the past five years, it’s a remarkable 1,282.62%. The result of those huge gains pushed its market cap — which is determined by multiplying the current stock price by its total number of outstanding shares — to stratospheric levels.
Much of that growth has been the result of unabated demand for Nvidia’s core processors, driven by AI Hyperscalers such as Amazon Web Services, Microsoft Azure and Google Cloud Platform.
At the same time, search for other big tech firms outside of AI remains strong. Tesla, for example, uses Nvidia chips to implement applications in its autonomous driving technology.
Accordingly, Nvidia is viewed as a lynchpin in all corners of the AI Market with three of the world’s largest asset management firms – Vanguard, Blackrock and Solomon shares.
As stocks continue to be favored by institutional and retail investors, It is now more important than all sectors of the S & P 500, including utilities, energy, construction materials and consumer goods – and the joint markets of all companies operating in those active sectors.
To put $5 trillion in context, it is:
- More than a combined total of 15 companies make up big PHARMA
- More than the GDP of every country in the world except the United States and China
- The equivalent of 10 Exxonmobils, 25 DISTYS, 50 Nikes, 96 Ford Motors and 3,311 Jetblues
But as the company’s market continues to explode, it presents a risk to those with a large investment portfolio.
Nvidia’s Market Cap is a bullish risk
The bigger Nvidia gets the risk of a breakout becomes the bigger gainer in the major indices. Nvidia has grown so much that it now has a weight of 7.99% of the total weight of the S & P 500, while its weight in the tech-heavy nasdaq reaches 12.18%.
This means that, even for investors who may not be directly in the stock, a total of 8 cents are invested in NVIDIA, while nearly 12 cents of every AASDAQ Index Fund dollar is allocated to the AI Giant.
This has raised concerns from the biggest tech investors. Ark Deter CEO Cathy Wood told CNBC that she expects an AI fix. But the wood has also stopped giving the label “bubble” to the ongoing bull market, although its gains are driven primarily by the best members who use the big costs of AI.
“I’m not saying that there will never be a fix. It will happen,” said the wood. “But if our expectations of AI … are correct, we are at the beginning of a technological revolution.”
While this may be the beginning of that development, investors who are close or retired and do not have enough time to get a big loss of the stock, the correction from Nvidia and other companies have received a lot in AI can face suspicions in their nest eggs.
“Investing in retirement is more complex, given the range of risks and uncertainties Anil Surti, Head of asset allocation and portfolio construction at MERRILL Bank.
Older investors can reduce those risks and uncertainties by seeking a balanced allocation. That can be achieved by using a balanced index fund where nvidia has the same impact as the smallest company in the S & P 500.
Alternatively, the re-matching of low-risk vehicles such as bonds and certificates of deposit can help hedge against potential losses.
Importantly, those strategies are exclusive to investors with short horizons. For those with decades ahead of them, enduring exposure to growth stocks remains the best way to increase wealth over the long term.
After all, Nvidia’s achievement is not revolutionary. To quote Warren Buffett, “when a business does well, the stock eventually follows.”
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