Nvidia's skyrocketing shares: A portfolio blessing or a bubble waiting to burst?
As the chipmaker’s influence grows, investors grapple with the dilemma of potential reward versus the peril of placing too many eggs in one basket
As Nvidia's stock continues its dramatic ascent, powered by its dominance in the AI chip market, investment strategies heavily weighted in the tech giant are delivering high returns.
However, it is also raising concerns about overexposure and market volatility.
Why it matters: Nvidia's meteoric rise has been a boon for portfolio managers, but it also magnifies the risks associated with heavily concentrated investments in a single stock, especially in the volatile tech sector.
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By the numbers:
- Nvidia shares have surged 785% since the start of 2023, with a 160% increase this year alone, driven by robust demand for its AI chips, reports Reuters
- Nvidia accounted for about a third of the S&P 500's nearly 17% gain this year, showcasing its significant impact on the market
- Nvidia, once briefly the world's most valuable company, exemplifies the risks and rewards of large single-stock exposures in investment portfolios
- With 355 actively managed funds now heavily weighted in Nvidia, up from 108 last year, the stakes are high
Who's saying what:
There's a mindset among some portfolio managers that they missed the boat on Apple or Microsoft, and they don't want to be wrong on AI.
Does having 6% or more of your portfolio in one stock create outsized risks? The answer is, obviously, yes.
Big picture: The tech-heavy Nasdaq and the broader markets have felt Nvidia's influence, with the company's fortunes causing broader market shifts.
Last week's 6% drop in Nvidia shares prompted a ripple effect, underscoring the volatility that comes with high concentrations in tech.
Between the lines: Some fund managers are reaping the benefits of their Nvidia bets, with actively managed US equity funds holding the stock up 16.3% on average over the first six months of 2024.
However, the looming risk of a downturn, given Nvidia's high valuation and increasing competition, is a concern.
On the flip side: Not everyone has stayed the course with Nvidia.
Kevin Landis, chief investment officer, Firsthand Capital Management: "I took profits in 2020... I can't look at any of my screens now without feeling a twinge of regret.
The bottom line: While Nvidia has been a golden goose for many investment portfolios, its high concentration in some funds poses significant risks, highlighting the classic investment dilemma of balancing potential rewards with the threat of significant losses.
