Nvidia's Stock Surge Raises Concentration Risks For Investors, Warns Analyst: Not 'Smart...To Have That Many Eggs In One Basket''
Investors have been riding high on the wave of Nvidia Corp’s (NASDAQ:NVDA) soaring stock, but the outsized positions could spell risk if the chipmaker’s shares take a downturn.
What Happened: Led by Jensen Huang, Nvidia shares have seen a staggering 785% increase since the start of 2023, with a 160% rise this year alone. The surge is attributed to the high demand for Nvidia’s chips, considered the gold standard in the AI field.
Asset managers have increased their holdings of Nvidia as its stock price has surged. Data from Morningstar reveals that 355 actively managed funds held Nvidia positions that accounted for 5% or more of their assets at the end of the first quarter of 2024, a significant increase from 108 funds in the same period last year.
However, the concentration in Nvidia shares could pose a risk to investors if the stock hits a rough patch, Reuters reported on Monday. Despite the average price target for the stock standing at $133.45, some market participants point to increasing competition, an expected balance between supply and demand as Nvidia ramps up production, and the company’s rich valuation as potential reasons for a downturn.
"Does having 6% or more of your portfolio in one stock create outsized risks? The answer is obviously, yes," said Phil Orlando of Federated Hermes.
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"The fact that one stock did take off like a rocket ship doesn't mean that it was smart … to have that many eggs in one basket."
Technology-sector funds overall have the largest weightings in Nvidia, with four Fidelity funds each holding more than 18% of their assets in the stock. Other diversified funds are also taking on similar risks, with the Baron Fifth Avenue Growth fund holding nearly 15% of its portfolio in Nvidia and the Fidelity Blue Chip Growth fund holding about 13% of its portfolio in the stock.
Some people who have sold all their stocks regret not holding on for longer. For example, Kevin Landis, the chief investment officer at Firsthand Capital Management, sold his Nvidia position in 2020 after owning it for several years, and although he believes it was a wise decision, he still wishes he had held on for longer to benefit from the potential gains.
Kevin Landis, chief investment officer at Firsthand Capital Management, said he was “prudent” and took profits in 2020 in a Nvidia position he owned for several years. Still, he can't help thinking about the gains he missed out on.
“I can't look at any of my screens now without feeling a twinge of regret,” he said.
Why It Matters: James Anderson, an early investor in companies like Tesla and Amazon, recently predicted that Nvidia could achieve a market capitalization of nearly $50 trillion within the next decade. His optimism is rooted in Nvidia’s role in the growing demand for AI chips.
However, not everyone shares this bullish outlook. Ed Yardeni, President of Yardeni Research, warned that the AI market might be inflating into a bubble. Additionally, Ed Egilinsky, Managing Director at Direxion, expressed concerns about Nvidia’s high valuation.
Price Action: On Monday, Nvidia’s stock was trading 0.57% lower at $128.50 at the time of writing, according to Benzinga Pro.
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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari