Why I am not buying NVidia Stock?

In case of doubt, I prefer to miss an opportunity

Nvidia is an incredible company and is transforming itself into the business and economic experience of the decade. At the heart of the AI revolution, the company is showing incredible performance to the extent that quarterly profit now exceeds the annual revenue of 2020 (and nearly that of 2021).

The company's technological dominance is felt in its ability to innovate and capture the largest share of the market. Its profitability is simply incredible. The net margin exceeds 50%, with a ROIC of 65%. NVidia is swimming in cash with over $50 billion available. Unsure where to invest it, they are buying back their shares.

And yet, I remain outside the stock. But why, you may ask? I will explain in this article to share my perspective. Let's be clear from the start, I don't claim to be right (I have actually been wrong, for example, with Hermes, refusing to enter even though the reasons are different), I simply share my reasoning.

1. I missed the train

In my stock market experience, it can sometimes be costly to try to catch a moving train. It can resemble FOMO, and in many cases, the economic performance is catastrophic. I learned that the hard way.

2. It is an equipment business

NVidia's business model relies on chip sales, which are used to equip data centers. This type of equipment business is relatively cyclical and oscillates between phases of hypergrowth and more challenging phases.

Indeed, when the peak of the cycle is over and the market is equipped, the remaining business is maintenance and renewal. It is likely that the previous growth phase has left overcapacity, which will be purged, accentuating the cycle.

Recent examples of market reversals in equipment exist with explosive examples where darlings of the market have turned into pariahs in a matter of days: MIPS or Enphase, for example.

Of course, it is always possible to argue about the immensity of the potential market or the idea that renewal will create enough business to justify everything. Personally, I have doubts, and when I have doubts, I prefer to stay away.

3. Competition could awaken

The technological supremacy of Nvidia is obious. And indeed, the impressive estimates of future growth are based on the assumption that the company will maintain a very significant market share in the future.

But what would happen to the stock if a competitor developed a solution at least as effective? Or if, to avoid creating too much dependence, one of Nvidia's major clients decided to buy chips from a competitor, even if they were less efficient? One could also imagine competitors emerging given the incredible cash generation that the business represents ($91B FCF estimated for 2027! - almost the same as Microsoft).

These are certainly just scenarios, but any of them could compromise the company's future performance projections, especially if the equipment cycle changes - and we are back to our point number 2.

4. Ultra crowded stock

Nvidia is probably one of the most traded stocks at the moment. Despite a market capitalization of several trillion dollars, daily fluctuations can be excessively violent.

Any argumentation or discussion about the company is difficult. Some find it too expensive - even if the assumptions materialize, the company is not excessively valued. Others imagine that the market capitalization could still be multiplied by 5 or 10 - which, it must be admitted, is unlikely in the near or medium term.

It is reminiscent of the frenzy that can surround growth companies. Tesla is a recent example, and while the company continues to be interesting, turbulence can lead to a harsh reality check. I don't like these kinds of stocks because finding information becomes difficult under these conditions.

5. Not good for my sleep

The accumulation of extremely positive hypotheses (market size, market share, cycle strength) leading to risk, it is not a stock that will allow me to sleep peacefully at night. Managing positions in these conditions is very difficult, which creates a risk of making bad decisions.

Conclusion

It is undeniable that Nvidia is a high-quality company with exceptional momentum and performance. However, for all the reasons I have mentioned, I am not comfortable buying it.

Looking back, most of the purchases I made when I had doubts didn't turn out to be relevant and I don’t judge the risk/reward ratio interesting enough. In these circumstances, I prefer to stick to my investment philosophy and stay out of the stock. You can not always win! Fortunately, the stock market is large enough to find other quality stocks. How about you? Do you have any Nvidia stocks?