Does Nvidia Stock Belong in Your Retirement Portfolio?

Few stocks have done so much for so many investors in recent years as Nvidia (NVDA 1.99%) has. The tech giant has generated life-changing returns for investors in a fairly short time frame. In a span of five years, it turned a $40,000 investment in the business into more than $1.1 million. Investors would likely be happy with those kinds of returns over a 20- or 30-year period. Nvidia did it in five.

The challenge for investors today is whether it’s still worth buying the stock, particularly for your retirement portfolio. At a market cap of around $3.5 trillion, has Nvidia’s stock become too expensive for it to still be a good investment to hold until retirement?

Plenty of growth still out there for Nvidia

If you’re investing for retirement, you may want to target top-growth stocks like Nvidia which can generate significant returns and make the most of your money. And the good news is Nvidia’s business is still growing and more than doubling its sales and profits. Over the six-month period ending July 28, the company’s net income totaled $31.5 billion — nearly four times what it generated a year ago ($8.2 billion). Sales totaled $56.1 billion and rose by 171%.

Nvidia is a leader in the artificial intelligence (AI) chip market, making its products crucial for companies looking to develop next-gen technologies and chatbots. And as the arms race continues in AI with tech companies trying to create the best technologies, Nvidia’s products are going to remain in high demand. As long as that remains the case, the company has the potential to generate significant revenue and profit growth for years to come.

Why Nvidia’s valuation could be a problem

The bad news is that with such a high valuation, all those future-growth expectations may already be reflected in the stock price. The stock, for example, trades at a price/earning-to-growth (PEG) multiple of around one. That would imply that analysts project the business to grow its earnings at a rate of around 60% (similar to its current price-to-earnings multiple). If that ends up being true, then it will indeed be a good buy right now.

But if those projections don’t map out, and there’s a slowdown in AI spending, then that could significantly undermine the premium investors are willing to pay for the AI stock. And this is where for people saving for retirement, the risk of owning Nvidia’s stock could become too large, since a lot depends on those forecasts for AI-related spending. And investors shouldn’t forget that OpenAI CEO Sam Altman warned that expectations are getting too high and that “people are begging to be disappointed and they will be” when discussing ChatGPT-4. His words could prove to be prophetic, and if they are, a highly valued stock like Nvidia may be susceptible to a significant correction.

Can Nvidia be a good stock to hold if you’re investing for retirement?

Nvidia has a lot of potential growth it can still realize in the future. But in the short term, there’s the potential for some volatility in AI stocks. And that’s why the test could come down to your expected-holding period. If you are at least five years away from retirement, then Nvidia may be a good stock to hang on to. By planning to hold on to it for the long term, you can avoid the short-term risk it faces of a correction as a longer holding period can give the stock more time to recover in the event of a sell-off.

But if you’re a lot closer to retirement or are already in your retirement years and may need cash on short notice, then Nvidia may not be a suitable stock to hold. And that has less to do with the business itself and how solid it is; instead, it has more to do with the market and industry-related conditions which may weigh on the company in the short term.

Nvidia is a great stock to own for the long haul, but it’s important to consider your own personal investing goals as it may not be a suitable option for all portfolios.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.