Nvidia’s Meteoric Rise: Boon or Bust for Portfolio Managers? An In-Depth Analysis
By David Randall
NEW YORK (Multibagger) - The staggering ascent of Nvidia (NASDAQ: NVDA) has been a goldmine for portfolio managers this year, but the heavy reliance on this AI powerhouse could amplify risks if the chipmaker faces any downturn.
Nvidia’s shares have skyrocketed approximately 785% since the beginning of 2023, with a 160% surge this year alone. This explosive growth is fueled by high demand for its cutting-edge chips, which are considered the gold standard in Artificial Intelligence (AI). Briefly, in June, Nvidia even became the world’s most valuable company, though it ceded the title back to Microsoft (NASDAQ: MSFT) after a slight dip.
Asset managers have significantly increased their Nvidia holdings in tandem with its stock price rise. Morningstar data reveals that 355 actively managed funds had Nvidia positions accounting for 5% or more of their assets by the end of Q1 2024, a sharp increase from just 108 funds in the same period last year. Funds often hold large positions in a single stock to maximize profits or track an index.
“There’s a mindset among some portfolio managers that they missed the boat on Apple (NASDAQ: AAPL) or Microsoft and they don’t want to be wrong on AI,” says Jack Shannon, a senior analyst at Morningstar. “They don’t want to sell.”
Nvidia’s dominance exemplifies how investors are placing huge bets on a few massive growth stocks, creating one of the most concentrated market advances in history. Nvidia alone has contributed to roughly one-third of the S&P 500’s nearly 17% gain this year, according to S&P Dow Jones Indices.
The market has been extraordinarily narrow, with only 24% of stocks in the S&P 500 outperforming the index in the first half of 2024, according to BofA Global Research strategists.
Funds holding Nvidia have enjoyed substantial gains. Actively-managed U.S. equity funds with Nvidia in their portfolios saw an average return of 16.3% in the first six months of 2024, compared to 5.7% for those without Nvidia, Morningstar data shows.
However, heavy concentration in a single stock can be a double-edged sword if Nvidia shares stumble. Although the average price target for Nvidia stands at $133.45, some market analysts point to increasing competition, a balancing supply-demand outlook as Nvidia ramps up production, and the company’s high valuation as potential risk factors.
Nvidia currently trades at 39.3 times forward earnings, about 50% higher than its industry median, according to LSEG.
“Does having 6% or more of your portfolio in one stock create outsized risks? The answer is obviously, yes,” states Phil Orlando, chief equity market strategist at Federated Hermes (NYSE: FHI). “The fact that one stock did take off like a rocket ship doesn’t mean it was smart to have that many eggs in one basket.”
Last week’s sharp one-day rotation out of Big Tech stocks, triggered by cooler inflation data, served as a sobering reminder of the risks. Nvidia fell nearly 6% that day, its biggest drop in over two weeks, while the tech-heavy Nasdaq lost about 2.2%. Both regained some ground the following day.
‘Twinge of Regret’
Technology-sector funds have the largest weightings in Nvidia, with four Fidelity funds holding more than 18% of their assets in the stock, according to Morningstar. Other diversified funds are also taking on similar risks. For example, the Baron Fifth Avenue Growth fund has nearly 15% of its portfolio in Nvidia, and the Fidelity Blue Chip Growth fund holds about 13%.
Anthony Zackery, a portfolio manager at Zevenbergen Capital Investments, has owned Nvidia since 2016 and continues to maintain a core position, trimming it periodically to stay within his firm’s risk-tolerance guidelines. His fund can hold up to 13% of one stock in growth portfolios to align with weightings in its benchmark, the Russell 3000 Growth Index. “This is a company at the forefront of the next trend in technology,” he says.
On the other hand, some investors regret not holding onto their Nvidia shares longer. Kevin Landis, chief investment officer at Firsthand Capital Management, took profits in 2020 after holding Nvidia for several years. “I can’t look at any of my screens now without feeling a twinge of regret,” he admits.
Breaking It Down: What This Means for You
In simpler terms, Nvidia’s stock has seen massive gains, making a lot of money for investors who own it. However, having too much of your investment in one stock can be risky. If Nvidia’s stock goes down, those same investors could lose a lot of money quickly.
Nvidia’s rise has been so significant that it has outperformed many other stocks, making it a big part of the overall market’s gains this year. But remember, what goes up can come down. Even professional investors are cautious about having too much of their money in one place because it can lead to big losses if the stock price drops.
For everyday investors, the lesson here is diversification. Don’t put all your eggs in one basket. Spread your investments across different stocks and sectors to minimize risk. While it’s tempting to chase big gains, it’s important to consider what would happen if those stocks don’t perform as expected. Diversified portfolios are generally safer and more stable in the long run.