Would you invest in something that didn’t pay you back for a century?
I wouldn’t.
Every time I gamble on a hot stock that has run up, I’m late to the party and I lose money.
That’s why I’m steering clear of Nvidia (NVDA) now. Its shares are trading for more than 100x last year’s earnings. That means if it paid you everything it earned, it would take 100 years to get your money back.
My Wide Moat colleague and analyst Stephen Hester recommended buying Nvidia shares back in March.
The stock has gone up more than 60% since.
For those who got on board when Stephen made this recommendation, congratulations are in order.
But at this point, it is far too expensive for the rest of us to join the club.
Now, I’m not the most tech-savvy guy. But I’ve lived through a couple of “tech revolutions.”
They always fizzled out after a few years.
Maybe this time is different.
But I’m not going to bet on it by buying one of the priciest stocks on the market. I’m not afraid of missing out when there are ways to invest in safe, dependable income that will help me sleep well at night.
Here at the Intelligent Income Daily, we’re focused on finding the safest income investments on the market.
It’s tempting to chase after the stocks that are leading the market to new highs. But highflyers can just as easily crash and burn when they don’t live up to expectations. A slow and steady approach will still get you where you want to go without the rollercoaster ride.
Today I want to explain why I’m not getting on the Nvidia bandwagon at this point. I’ll also give you another way to invest in AI while collecting a steadier yield.
Why Nvidia Is No Longer a Good Buy
There are several things I look for when I’m investing my hard-earned money.
First – is the company well managed?
Nvidia is well managed – the company has a strong brand and develops some of the most advanced chips on the market. That translates to fast growing profits.
Nvidia’s recently released H100 chip is up to 9 times faster at training AI than its previous version. It also has a built-in engine that accelerates generative AI programs like ChatGPT.
And despite costing $40,000 each, demand is through the roof for these chips.
Second thing I look for in a company I’ll potentially invest in – do they reward shareholders?
Now, the answer to that is a bit tricky. On the surface it may appear that Nvidia rewards shareholders, but let’s examine the evidence.
The company spends a lot of money buying back its stock. When a company buys back stock, it reduces the number of shares in circulation – and raises the value of existing shares.
Now, I’m all for buybacks… if they are done at a reasonable price.
But Nvidia’s stock price has been anything but reasonable. Which means all that money the company is throwing into share repurchases is not creating a lot of shareholder value.
Over the past five years, Nvidia has earned $25.4 billion. In that same time, it has spent $17.5 billion on buybacks. And in May 2022, the board of directors increased the company’s repurchase budget to $15 billion through December 2023.
Guess how much it cut its shares outstanding?
Zero.
Nvidia’s share count is almost the same as it was five years ago. The company rewards its employees with a lot of shares, and then buys them back at ridiculous prices – not a smart move in the long term.
As you can see in the chart above, the number of shares has not changed much since January of 2019.
So even though Nvidia spends a lot of money buying back shares, shareholders aren’t getting much value out of it. And to top it off, the company pays an insultingly low dividend that hasn’t increased in nearly five years.
And the last thing I’m looking for is this – is it fairly valued (or better yet, undervalued)?
Nvidia is priced for perfection. There is no room for market volatility or human error.
Its stock trades at 35x last year’s sales and 112x earnings. In comparison the average company on the S&P 500 goes for just 2.5x sales and less than 20x earnings.
Even taking into account the company’s huge increase in expected earnings this year, it’s going for 22x sales and 49x earnings.
Put another way, if Nvidia paid out 100% of its earnings as dividends it would take nearly half a century to recover your investment!
That is not a good long-term investment.
But there’s another way to play the AI trend… and collect a juicy dividend at the same time.
Tech Dinosaur?
Most people think International Business Machines (IBM) is an obsolete tech dinosaur.
And to be fair, the company has made some missteps. But today it’s working on cutting-edge technology like quantum computing and AI.
IBM has a long history with AI. It developed the Deep Blue supercomputer that defeated chess grandmaster Garry Kasparov. It also built Watson, a supercomputer that defeated Jeopardy! legend Ken Jennings.
(Source: Kasparov.com)
According to IBM’s CEO Arvind Krishna, public-facing AI applications like ChatGPT are just the tip of the iceberg.
The real value of AI comes into play for companies developing models using private, proprietary data and monitoring them to make sure they are accurate and accountable.
AI is likely to fuse with everything related to tech – from mainframe computers to storage and maintenance to cybersecurity – and IBM will be there to help customers make it work.
Unlike Nvidia, IBM’s stock is reasonably valued at just 14x earnings. And it pays a 5% dividend, which has increased every year for 28 years. That’s the kind of dependable income that helps me sleep well at night.
In fact, I would suggest locking in your profits for NVDA if you were one of the lucky few to follow Stephen’s advice. And if it makes sense for your portfolio, consider selling a portion of those profits to purchase IBM.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
Source: Wide Moat Research