graphic chip manufacturers Nvidia (NVDA 3.12%) It seems like you can't do bad things these days. The company's stock has recently soared above $900, and it wouldn't be surprising if it hits $1,000 soon. This is unusual considering that just five years ago the stock was trading at less than $50. The semiconductor specialist, which has benefited from the generative artificial intelligence (AI) boom, has become the ultimate Wall Street darling as companies race to acquire advanced AI chips.
NVIDIA stock definitely deserves a big jump considering the chipmaker's impressive performance. This technology company's revenue increased by 126% year-over-year in his fiscal year 2024, as data center revenue increased by his 217%. However, it is worth viewing the astronomical rise in stock prices with some skepticism.
To explain the risks inherent in Nvidia stock today, I would even say the following. mcdonalds (MCD -0.32%) From here, it may become a more attractive long-term investment. This boring, mature fast food burger chain's more conservative valuation and predictable business have probably combined to make it a better value proposition for investors compared to Nvidia. I know this may shock or even infuriate some of his Nvidia bulls, but hear me out. This isn't his pitch to Nvidia shareholders, but a reminder that not all stocks are right for everyone.
assessment risk
On the surface, NVIDIA's price-to-earnings ratio of 77 appears to be well justified by the company's fundamentals. Not only did his 2024 revenue more than double, but his earnings per share also increased by 586%. With such growth, investors may conclude that the company can easily grow up to the stock's valuation.
But investors need to take into account the possibility that demand for AI chips will slow down in the future, taking a big hit to Nvidia's operating margins. One of the main reasons why Nvidia's revenue increased so much compared to its sales was the significant improvement in operating margins. Due to the surge in sales, Nvidia's operating margin increased from about 34% in his fiscal year 2023 to about 61% in fiscal 2024. While the company's operating margin growth is encouraging, such a large margin increase means there is a risk of moderate to large margin increases. Key profitability metrics may return at some point in the future. For example, if supply and demand for Nvidia's data center products become more balanced over time, unit sales growth could slow, chip prices could decline, and operating margins could be compressed at the same time. There is therefore a risk that future conditions will make investors more reluctant to pay 77 times earnings.
Compare this to McDonald's, which has a much more conservative price-to-earnings ratio of 24x and more stable operating margins. To its credit, McDonald's operating margin has expanded from 42% pre-coronavirus to 46% now. However, given how the company's operating margin expansion has been slower and smaller than Nvidia's, a return to the burger chain's pre-COVID-19 operating margin levels is unlikely to be possible (with management and investment). It is likely to happen at a slow and manageable pace (manageable for both parties) and will have a huge impact. The negative impact on profits will be smaller. McDonald's investors therefore have plenty of time to react to changes in the environment, perhaps supplemented by the fast food king's long-standing dividend (currently yielding 2.3%), while reconsidering the stock's long-term outlook. It will be evaluated. .
Visualization risk
Additionally, most would agree that the pace of disruption and change is much faster in semiconductors than in fast food, especially when comparing the market leaders in both industries. For example, let's look at the following rise and fall. intel This reflects that the company's once dominant industry leadership has been easily eroded by competitors such as: Nvidia, broadcom, others. The days of Intel's leadership are long gone. Over the past five years, Intel's stock price has fallen by 20% and Nvidia's stock price has risen by more than 2,000%.
On the other hand, McDonald's has easily maintained its leadership position as a global restaurant chain for decades. The company's stock price has risen more than 50% over the past five years, and not only has the company consistently paid meaningful (and increasing) quarterly dividends to shareholders, but the underlying business continues to grow rapidly as well. This strong growth continues today. Gorbal's comparable restaurant sales increased by 9% year over year in 2023, and from 2019 he increased by 30%. The company's size, customer loyalty, and consistent service across all stores have created a broad and predictable “moat” for the business to keep customers coming back. And looming competitors.
It's no exaggeration to say that McDonald's business is more predictable than Nvidia's. The chances of a new competitor disrupting the burger chain are much lower than the chances of a competitor cutting into his Nvidia's semiconductor leadership. Additionally, the impact of potential negative outcomes, such as Nvidia relinquishing a large lead over competitors or a slowdown in sales, could be significant, given the risk of significant margin compression and high valuations for growth stocks. This could have disastrous consequences for
Don't get me wrong. I may be drastically underestimating Nvidia. Indeed, I may be more likely to do so. However, the history of the technology sector (particularly the semiconductor industry) shows that competitive dynamics are highly unpredictable in how they develop over time. Because of this, I strongly believe that McDonald's has better visibility into its business than NVIDIA. The difference is such that I would rather bet on McDonald's stock.
Of course, I would consider investing in Nvidia at the right price. However, the price is very attractive and should leave a meaningful margin of safety in my calculations about the company's potential future. In other words, I would consider buying his Nvidia stock if I thought it was trading at a significant discount to its estimated fair value. However, the current price is far above what would be needed before the stock could trade with a sufficient margin of safety.
Risk and reward are closely related
This doesn't mean McDonald's stock will outperform Nvidia stock over the long term. Rather, the important point is that risk and reward are closely related. I believe that the potential rewards for investors from McDonald's stock compared to the potential risks of owning McDonald's stock is an overall better value proposition than the current risk-reward profile of NVIDIA stock. I would like to claim that it brings about.
One last thing: Investors need to remember that they don't need to invest in every hot stock. If you think the risk is too high, it's okay to sit on the sidelines and not participate in the investment. Every investor is different. For example, I'd rather pick a stock with lower valuation risk and better name recognition than Nvidia, even if it means missing out on big profits. In the meantime, I'll sit back with some popcorn and enjoy the show without criticizing those who choose to invest in his Nvidia stock. Many people have a higher risk tolerance than I do, and that's okay.
Daniel Sparks has no position in any stocks mentioned. His clients may own shares in the companies mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: A long January 2023 $57.50 call on Intel, a long January 2025 $45 call on Intel, and a short May 2024 $47 call on Intel. The Motley Fool has a disclosure policy.
