Nvidia’s Red-Hot Shares Pose Risk for Investors
Artificial intelligence darling Nvidia has seen its shares soar by 785% since the start of 2023, with a 160% gain this year alone. The chipmaker’s popularity has led to a surge in portfolio managers’ returns, with 355 actively managed funds holding Nvidia positions that total 5% or more of their assets. However, this concentration in a single stock poses significant risks if Nvidia’s shares were to experience a reversal of fortune.
Nvidia’s shares have been driven by demand for its chips, seen as the gold standard in the AI field. The company briefly became the world’s most valuable company in June, before a dip in its shares returned that title to Microsoft. Asset managers’ holdings of Nvidia have swelled alongside its stock price, with funds maintaining large positions in the company for various reasons, including to maximize profits or track a stock’s weight in an index.
The oversized positions in Nvidia are another example of how investors have cast their lots with a handful of massive growth stocks, leading to one of the most concentrated market advances ever. Nvidia alone has accounted for around a third of the S&P 500’s nearly 17% gain this year, according to S&P Dow Jones Indices.
While funds that owned Nvidia have so far reaped the benefits, concentration in a single stock can hurt investors if Nvidia shares hit a rough patch. 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 possible reasons for a downturn. The stock trades at 39.3 times forward earnings, about 50% more than its industry median, according to LSEG.
Phil Orlando, chief equity market strategist at Federated Hermes, warned that having 6% or more of your portfolio in one stock creates outsized risks. “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,” he said.
Investors got a taste of how concentrated positions can be a two-way street last week, following a sharp, one-day rotation out of Big Tech stocks sparked by cooler inflation data. Nvidia fell nearly 6% on Thursday, its biggest daily drop in more than two weeks, while the tech-heavy Nasdaq 100 lost about 2.2%. Both pared those losses the following day.
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. However, some portfolio managers are 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.
Anthony Zackery, a portfolio manager at Zevenbergen Capital Investments, has owned Nvidia since 2016 and continues to maintain a core position, though he has trimmed it periodically to keep within his firm’s risk-tolerance guidelines. “This is a company that is at the forefront of the next trend in technology,” he said.
Some who sold out entirely, on the other hand, wish they had held on longer. 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.
