History Says Magnificent Companies Can Become Disappointing Stocks. Is Nvidia Next?

The fear of missing out — aka, FOMO — can lead to shocking excesses on Wall Street. So-called bubbles can push stocks so high that you start to believe that the sky’s the limit. Right now, it looks like Nvidia (NASDAQ: NVDA) can do no wrong, and its share price has risen accordingly. If you pay attention to Wall Street history, however, you’ll see that buying Nvidia today could easily end up being the wrong call.

Nvidia’s stock gains have been incredible

The big story with Nvidia is that it makes high-powered chips capable of running artificial intelligence (AI) applications. AI is a huge story today in the technology sector, with just about every company that can do so either directly working on an AI product or explaining to investors how AI will be a direct benefit to it in some way (by increasing efficiency or automating tasks, for example). Wall Street is highly enamored of AI and anything associated with it.

Image source: Getty Images.

Given Nvidia’s direct connection to the space — and its surging earnings from it — the stock has advanced rapidly. Over the past year alone the stock has gained 223%. Over the past three years, the gain is more than 550%. Over the past five years, its gain is more than 1,860%.

NVDA Chart

NVDA Chart

Scan the 10-year price chart above and it looks like Nvidia’s stock is lifting off like a rocket. The combination of that price rise and the general AI fever has investors clamoring to buy it. But don’t jump on this rocket without considering some Wall Street history.

Ben Graham’s Depression-era wisdom

Benjamin Graham is the man who helped to train Warren Buffett and the author of iconic investing tome The Intelligent Investor. To paraphrase that Wall Street giant, even a good company can be a bad investment if you pay too much for it. A great example of that is Cisco Systems (NASDAQ: CSCO). Take a look at the graph below.

CSCO Chart

CSCO Chart

It would be hard not to notice how similar its rocket-like trajectory is to the Nvidia graph above. But the key feature of this graph is actually not the stock price — it’s the dates. The graph ends with the last trading day of 1999. The next graph brings the story up to the present, and it should be more than enough to frighten any investor who is currently all-in on Nvidia.

CSCO Chart

CSCO Chart

Simply put, after that giant peak during the dot-com boom there was a giant crash during the dot-com bust. And Cisco’s share price still hasn’t recovered all of the ground it lost. If you bought near the peak, you are still in the red on your investment (not factoring in dividends being reinvested).

You can argue that this is a cherry-picked example, which is true. But there are no crystal balls on Wall Street, and there’s no way to know for sure that Nvidia will avoid a similar fate. Indeed, while it has a dominant position now in the chips that support AI, competitors are working hard to catch up. When they do, Nvidia may not be quite so special anymore, and investors will probably sour on the shares. The history of Wall Street suggests that, at some point, Nvidia’s shocking stock price rise will end, just like it has for so many other stocks before.

TSLA Chart

TSLA Chart

Don’t forget about gravity

Few companies can defy gravity forever. Tesla‘s (NASDAQ: TSLA) shares, for example, have fallen by roughly 50% since the electric vehicle giant became sustainably profitable around 2020 and are down nearly 60% from all-time highs reached in late 2021. That might seem counterintuitive, but stories are often more powerful on Wall Street than profits. And when a story gets old, lofty stock prices have a painful habit of crashing back down to earth.

Don’t let FOMO get the better of you. Nvidia may be a magnificent company, but it could still end up being a terrible investment if you pay too much for it.

Should you invest $1,000 in Nvidia right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

History Says Magnificent Companies Can Become Disappointing Stocks. Is Nvidia Next? was originally published by The Motley Fool

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