Is Nvidia a great buy?

Chandan and I are going to leave this. the session primarily Chandan. I'm just here. to help, the focus is evaluating whether Nvidia is a good stock to buy at this price under these circumstances. At Xillion, we believe finance has multiple layers. starts with earning, saving, investing, spending, borrowing, planning, how to do it all, and lastly, protecting. your wealth, we at Xillion help you. take care of each one of these So that whatever stage of life you. are on, whatever your immediate need is. we'll help you with that. We have tools. for that, and we have people for that. Some of our tools, for instance, if you. want to improve your 401k, we have a product for that. If you want to track your vacation budget, whether you're on track or not, we have tools for that. If you want to buy a home and you're on the edge of whether it's a good time or not, We have tools for you to figure it out precisely. And also how much you should save for emergencies, given the layoffs and the economy and the upcoming recession and all that, we have a tool for that which stocks you should invest in Nvidia or not we have tools for that. Should you invest in real estate? we have tools for. That’s a lot of tools; not just that, we also give you a money score, which you can think of as the more mature sibling of credit score. If you know your money score, you can actually figure out how and how quickly you can actually achieve Financial Independence. so check it out and also a few other tools. If you have multiple loans, we help you navigate those and say hey, this one should be paid first, and then the next. best of all, we have human mentors, people like myself, like Chandan. If you have a question about something that overwhelms you, whether it's you know which stock to buy or whether you should buy real estate, we have people who can actually help you and walk you through the decision. Check us out. Our goal is that you should be able to do everything in finance and take control of your financial life by investing less than 10 minutes a week.

Okay, with that, let me introduce you all to Chandan Malu. We have known each other for a few months. and I'm a big fan of his knowledge and., more importantly, his passion for finance. Chandan and I share something very unique, which is we are both engineers, but then we kind of fell in love with the world of Finance, right, I actually went to business school, and Chandan is like no, that's for losers. He didn’t go to business school. He actually learned it all himself. Let me hand it to you, Chandam, so you can say a few things about yourself and. and tell the audience who you are. You know what are you up to?

First of all, thank you so much, Gagan for giving me a chance to reach out to your audience. I appreciate the time. I would say I'm a pretty humble beginner; lived in the US for 10 years. Worked at Amazon and Twitter. Like you, I was just curious about stocks for a pretty good time, but never invested in it. I was back in India and had some investments never looked at it. 2020 came in, and I thought, this is what I had seen in 2008. I knew that this was a good time to put in money, so I put money to work. and it worked out really well for me. The biggest problem I faced was what stock to buy and what price to buy in; those were some of the questions that always lingered on me, and I started getting into this. world, I built something called SECdriver.com. Based on my learnings in the stock market, it's a simple attempt to understand what drives stock prices. how to evaluate businesses and, I guess, Warren Buffett. I've been a fan of Warren Buffet and Charlie Munger, and they have been a big source of inspiration for me in this journey.

Yeah, so I'm just showing a real quick, you know what? Chandan has built he's a he's a one-man Swiss Army knife, so he has done it all. That's great. Thank you, Chandan, for the quick summary.

This is Nvidia, and I don't know how many of you knew, but Nvidia went public in 1999; if you had bought $1 worth of stock, you would have $1,120 today. I think It's the best wealth creator over this time period, and I don't think anything beats it, and it the company started in 1993. Chandan, do you have to add? No, I think, as Gagan just shared right I think stock investments are one of the best investments, and the key idea is to find a wonderful growing company and give that time, give that edge, and I'm pretty sure as Gagan is going to display later why time is so important in this journey.

Yeah, so I want everyone to think about it this way, Nvidia has become a darling over the last five years, but especially over the last year, right because look. at this hype when the market is. crashing, and Nvidia is climbing big time. So, let's actually split it into. multiple pieces, let's just take a look. at the last 10 years, even in the last 10. years, Nvidia has gone from basically like $3 to $500 at the peak right now. let's split this journey into multiple. Parts if you had held if you had. bought the stock 10 years ago in 2013 and held it until 2018; you would have made 77x returns okay, great, right, but 2018. what was happening around this time? Does anyone have any guesses as to why this is happening? big other than gaming, they've always. been great at. gaming, and we'll talk about these things. a little more. Do any guesses on what was happening? what caused a lot of this. price ramp up. Hint: it might have to do something with. Yes, absolutely right; Bitcoin mining crypto in general, right? So this hype cycle was crypto, and Nvidia almost by accident found itself in that hype cycle it's its chips were really well positioned to do mining even though the chips were designed for graphics, they actually worked out for mining, and we don't I think it didn't become public knowledge but around this time also its chips were getting started to be used in. AI also, but the story is not straightforward, so crypto crashes you. I know there was a minor crash, but I don't know. know if you all remember there were. initial coin offerings in 2017-18, and then SEC said this is all you know, like propaganda, and this is all just wasteful. and everything kind of stalled, you see. 50% drop in the value of Nvidia, what happened after that if you again you. actually lived through that, you know. After three months of Crash and held for another five years, this was another 8X. gain right by until 2021, but this is when the whole market had gained it was not just in Nvidia. This was the COVID boom, great, and then came the post-COVID bust 60% decline, so Nvidia is back to 2019 or early 2020 prices, and something else happened. Any guess what this is? I think we all kind of know AI, right? AI exactly, this is AI so. Nvidia has gone from one boom to another. This was, you know, like pre-2013, it was all gaming boom, and it grew steady. Then the crypto, then the AI. So lessons here you know one what. As Chandan said, compounding takes a long time. If you had sold this stock at any point before 2023, you would have lost money, relatively speaking from an opportunity cost standpoint, so holding finding a great company and holding for. a long, long time is key to building wealth through stocks. We'll talk more about this and the last part of the cycle, we are actually in a decline cycle if you see, Nvidia has gone up and down so now we are kind of in the down cycle. I think a lot of the hype about AI is priced in. Any questions so. far feel free to ask, don't. hesitate. Chandan, do you want to add? anything to do this? so. far great, um. Chandan, do you want to talk about this one? the price to sales and how to look at how the stock is valued?

Definitely, so I think, typically, the way market valuations work is that there are multiple ways a stock price is valued. In this case, we're trying to show you the "Price to Sales" metric, which a lot of people use in the industry. As you can initially see, from the period from 2020 to almost 2016—sorry, one second—let me explain. For those of you who are brand new to investing, "Price to Sales" is the total price of the company's stock market value. In Nvidia's case, it's 1 point something trillion dollars. What are its total sales? Let's say it's about $50 billion. So, for every $1 of sale revenue, the market is willing to give you $20 to buy this stock. If you want to compare, the S&P average is about 12 to $15. Anything above 15 is considered expensive, and below 15 is considered cheap. That's something to keep in mind. As you can see, Nvidia has jumped in every hype cycle, but currently, it's at about 31 or 32. Please go ahead, Chandan.

Yeah, thanks for that introduction on Price to Sales. I think the key thing to understand is that the price of a stock has multiple influences. In this case, what we're trying to show you is that from 2010 to 2016, the Price to Sales ratio of Nvidia was 10. Essentially, for every dollar that Nvidia was earning in revenues, the market was ready to give a $10 premium on top of that. Now, with all the hype and boom, the market is saying they're going to bid $30 for that revenue. The market is expecting that the revenue is going to catch up and hopefully, with time, go toward its average, which is like 10 to 15. Which is what the market values, right? A great question arose: 'Can compounding actually work in stocks, particularly those riding waves and hypes?' We'll address this in detail later, but the short answer is yes. I'd also add that if the leadership is competent enough to ride those waves, then a great company will succeed. For instance, IBM lost its way in the early 2000s and couldn't ride the waves. On the other hand, Amazon, Tesla, Google, Microsoft, and above all, Nvidia, are examples of companies where competent leadership identifies a wave, invests what's needed, and rides it—whether it's a hype cycle or a business cycle.

AI, for example, has some hype but also has real business potential, and good companies are investing in that. So, we've learned that Nvidia is undoubtedly a fantastic business with a charismatic CEO.

Any other questions on how to look at 'Price to Sales'? If you ask me, Nvidia is very highly priced right now. I wish I had invested 10 years ago, but who knew crypto would happen? Should've trusted Jensen, the CEO's competence, but didn't know enough about the industry. Right now, Nvidia is highly priced—like, 30x, 31x, which is twice as expensive as the S&P 500 average. So, it's hard to justify. Chandan, what are your honest thoughts? Would you buy Nvidia at this high 'Price to Sales' ratio?

Yeah, large numbers come into play as you keep growing. At some point, you're going to reach the size of the GDP, and then you can't grow more than 2-3%. That's the roadblock. As investors, we need to be pragmatic to figure out if we're getting what we expect in terms of future returns. Chandan made a great point. If you look at Google, Apple, and Facebook, they're mega-companies, but their growth is limited. Apple's revenue actually declined year-over-year this quarter, and Google is barely growing. Facebook also declined in the last couple of quarters and has just started growing again. Once you hit large numbers, you saturate the market. Like, if the AI market is, let's say, $100 billion a year, and Nvidia is already making $50 to $60 billion a year. Once they reach $100 billion, it's not about growth anymore; it's about profits. The growth is going to stall. Any questions on this? Okay, I just want to add that Nvidia has a pretty big growth runway right now. There's still a high chance it's going to keep going, but it all depends on the price at which you buy it. That's where investment comes in. Nathan asked—hello, welcome Nathan—'What about price to earnings?' We're just getting there, actually. So, Chandan, over to you. Another question about how to identify a company; we'll tackle that right after this slide. So, Chandan, what about earnings?

'Well, there's a strong correlation between earnings and stock prices. It may not show in the short term, but as earnings grow, stock prices typically reflect the same level of earnings. And you'll see a similar trend with Nvidia. Their stock price has grown at the same rapid rate as their earnings. However, in Nvidia's case, the stock price is astronomically high compared to the earnings. Yeah, and Nathan, we'll also put up the PE chart as well. By the way, for those who might not know, 'Price to Earnings' is the total market value divided by the total net profit of the company. And I won't even go into detail because, as Chandan said, Nvidia is in a hype cycle, and that ratio is way off the charts. Their 'Price to Sales' is 30. A good 'Price to Sales' is under 10 for a growth company, and a good 'Price to Earnings' is actually 15 or 16. The S&P average is around 15-16. If it gets above 18-19, people start saying the S&P is overheated. Nvidia is way over that; I think they're probably at 100 PE right now.

So, there's too much expectation from Nvidia. Wall Street expects them to grow more than 100% this year. By this measure, they'd have to grow at 100% for multiple years to justify the current valuation. Anything else to add, Chandan? 'Great, let's continue.

So, one more question: we're going to go back to the operating margin slide to show why Nvidia is such a wonderful business. Operating margin is essentially the profit margin; it shows how much real profit they make on every sale before taxes. In this case, as you can see in the graph, Nvidia started with mid-teen profit margins from 2010 to 2014. Now, its margins have ballooned to more than 20%, averaging around 22-26%. This shows pricing power, a very big sign for a wonderful business. However, I do want to say this: they've recently increased their prices due to high demand. Startups these days are raising significant funds. For example, a company—whose name I forgot—raised $4 billion from Amazon. Half of that money is likely going to Nvidia. Because of this, Nvidia has been able to raise prices, and people are still buying. But we know that when prices rise too much, they eventually crash.

So what is the ideal profit margin? That's a very specific question. The more important thing is what is a sustainable profit margin. Right now, Nvidia can charge whatever they want, but in the long term, it varies by industry. In software, the gross margin is often more than 90% because the cost to sell to the next customer is almost nil. Any company able to keep an operating margin above 20-30%, especially at such high revenue levels, is considered good. It depends on the industry. Retail generally has lower profit margins, while software has higher ones. Hardware falls somewhere in between. For example, Google's net margin is much higher than Nvidia's because Google primarily deals in software, which scales to billions of people easily.

In contrast, retail businesses like Walmart usually have a net profit in the 3-4% range. Amazon's retail business hardly makes any profit. So it really depends on the type of business and industry. For instance, airlines, until recently, could hardly ever hit double-digit margins; it was always in the single digits. There are two key things to consider: are those margins sustainable and growing for a good amount of time? That's crucial because competition will eventually kick in. The second key thing is the return on business investment, which is a more critical metric than margin. That will tell you if the business is expanding.

is it investing in the future that will drive its business? One of the things to keep in mind, as Chandan said, is sustainability. Take SentinelOne, for example; it's a security company that's growing wonderfully. They make $100 in revenue but spend $150 in advertising. You can grow at 100% that way, but it's unsustainable. On the other hand, Nvidia's operating margin declined in 2021-2022, but then it increased again when prices and demand rose. That's sustainability. A good example is Microsoft; they've had sustainable profit margins for the last 10-15 years, going through various cycles without much change in their profit margins.

Now, there was one more question: 'How could one have anticipated 10 years ago that Nvidia would be a great company?' That's a Hall of Fame-level question, and I'll try to answer it to the best of my abilities. I'll give you my own example as well. You'll know a great company when you see it, and when you do, you should trust yourself and invest. Take Facebook's IPO in 2012, for example. I invested almost 30-40% of my liquid net worth in Facebook. People from the finance background called me an idiot, but what I knew was that Facebook was a fantastic product. I had seen their traffic numbers grow by 30-40% every month, and based on that, I made a bet on Facebook. I sold that stock five to six years later after the election controversies, but it was a good bet.

I also invested in Tesla in 2013, before they even started making the Model S. Again, people called me an idiot. But whenever I talked to anyone who had seen a Tesla, they were in awe. Consumer Reports, which tests all kinds of products, said that the Model S blew everything else out of the water, including Lexus. So, when you put all these indicators together, you start to see the making of a great company.

Tesla focused on software first, so I invested in Tesla. I still own about 70% of the Tesla stock that I initially bought. This is what we encourage at Xillion. We help you find your 'Alpha,' what you're good at and know better than 99% of people. For instance, if someone followed Nvidia in its early gaming days and noticed that their chips dramatically improved PC game performance, that's an insight. If you were tuned into the hacker community, you could have seen early signs that their chip was being used more broadly because it outperformed other chips.

The point is, find what you excel at, delve deeper into it, and you'll find things that give you conviction. And if you're not sure, come talk to us at Xillion. We'll help you find that conviction. In the beginning, don't worry about the financial numbers. If you understand a product and its customer base well, chances are that the company will succeed in the long run. Does that make sense? I went on a bit of a tangent there, but I hope it's clear.

Now, back to Nvidia. Pay close attention to this: Data Center revenue. Everyone knows about AWS and Google Cloud. Until 2015-16, Nvidia was primarily a gaming company. Then they ventured into crypto and became a Data Center company. Now they're in AI. Their Data Center revenue has gone from less than a billion to 15 billion in the first half of this year alone. That's a 60x jump in less than a decade. This is the sole reason Nvidia is a trillion-dollar company today.

People who used to buy Intel or AMD chips now have no option but to buy Nvidia chips for their data centers, whether it's AWS, Google, or any other smaller data center. They need these chips for AI servers, and that's driving this growth. Would you like to add something? Oh, you're on mute. This slide shows how Nvidia has tapped into multiple sectors, achieving incredible growth in Data Center revenue. To go deeper into the Hall of Fame question about how to identify a great company, I'd say it's not just about identifying the company but the people behind it. Companies don't innovate; people do. In Nvidia's case, it's the founder and his team. They are the 'Alpha.' They saw opportunities and acted faster than competitors like Intel, which probably needed 30 meetings to approve a design. Jensen and his team moved swiftly. Probably did one or two meetings and. approved a design now you keep doing. that for 10 years 20 years 30 years.

You see this, right? Amazon, famously, like how many business lines has Amazon started? It boggles my mind. Apple, for that matter, right? So if you bet on a certain team of people, they're likely to give results over the long run. Okay, and this—does it make sense? So rather than identify a product which customers love, then follow the team that built that. And if you love the product, customers love the product, and you like the way the team is executing, buy those stocks. In the long run, it will work out handsomely.

Tailwinds for Nvidia: Sundar Pichai gave a talk when OpenAI came out, and everybody was saying, 'Google is dead.' Sundar Pichai gave a talk, and he said 'AI' about like 50,000 times in that talk because AI is that important right now. And this is exactly what's driving Nvidia. The thing is, this is where the founder and the team come in. Every four to five years, maybe every seven years max, there is a hype cycle which is also a business cycle. Business cycles shift every few years; there's a new technology, and businesses adopt that, and consumers adopt that. It was the internet, then it was broadband, then it was mobile. Things keep improving; every four to five years, maybe seven years, there's a hype cycle, there's a new business cycle. Great companies will always get into that, place themselves into that, and ride that. For Nvidia specifically, again, I don't know if you know, but Jensen Huang, he has like 35 direct reports, right? How many people do you know who have that many? Max, I have managed 30 people, and that was a lot of work, but he has 35. So they're able to make decisions much faster.

Some of the headwinds, and feel free to ask questions, please: Some of the headwinds—cloud providers are designing their own chips. Google started their Tensor chips a long time ago; I don't think they've made as much progress, but they have. Amazon is designing its own; Tesla is designing its own. Intel and AMD are a few years behind. Intel brought one of their old-time tech employees back; he was the CEO of VMware, and he left VMware to join Intel. I'm actually a little bit bullish on Intel because of that. So we'll see how it goes, but Intel and AMD, you know, as they say in American football, they say football is a game of inches; business is also a game of inches, maybe a game of quarters and years. And Intel and AMD, they'll probably nibble at Nvidia's market share.

Nvidia's profit margins and revenues—Chandan, do you want to talk about the regulatory aspects, and Apple, Tesla, and those ARM chips? Yeah, I think for Nvidia, the biggest challenge is that the consumers, who are consuming those chips, are also entering into the industry and they want to build their own chips. Yeah, they're working with other partners, right? And there's a big China headwind, essentially given the AI concerns. So one just has to be mindful about that; that also shows how important Nvidia is to the ecosystem. I think we've kind of touched upon all of these.

I just want to add one more thing. I think Gag was trying to say two key things: One, customers loving products, and you seeing it in action, right? Those are the two biggest sources of moat, and conviction matters. If you believe in the company but your conviction dies after 6 months or a year, you won't see that growth. You have to have conviction for the next 10 years, 7 years, to see that fundamental paradigm shift. Businesses don't blossom in one year, two years; they take time. So it's very important to have that conviction. And I call it 'feeling the pain,' like being able to suffer. If you can suffer that pain, if you can have that patience—Charlie Munger says 'sit on your ass investing'—if you can have that, it's going to reap wonders.

Yep, and just to paraphrase that, it's 'find great companies and hold onto them for a long, long time.' Okay, um, I think a question theme when people signed up for this masterclass was, 'Who's the next Nvidia?' Right? This might break your heart, but there may not be a next Nvidia for chips. The reason being, just like there wasn't a next Tesla, there wasn't a next Google. I think every 5 to 10 years, a company comes along that becomes a generational company. Google did it for search, Facebook did it for social, Apple did it in multiple segments, but every few years, there's a company that does that. Nvidia is that company for specialized chips. Again, they are not great at automotive chips or other chips, like commodity chips; they're very good at very specialized chips.

So if you're looking for this industry, there isn't another Nvidia that you should invest in. AMD can catch up; Intel can catch up. There are a few others, but ARM is public now, and they are very segmented into mobile. Qualcomm, again, is very mobile-specific. Nvidia is Nvidia. And if you missed it, that's okay, right? I never invested in Nvidia; it's fine. Because why didn't I invest in Nvidia? Because I did not know semiconductors. I just don't know. I'm a mechanical engineer, then I became a software engineer. What do I know about really hardcore chips? And I'm not a gamer. That's the other thing; I'm not a gamer. My son is a gamer, and he had very specific requests for Nvidia graphics chips and all that, but I had no idea, so I missed the entire boat. I'm not a gamer; I'm not into Bitcoin, although I was in data, so I should have caught the AI bug earlier. But I missed it, and that's okay. The idea is you cannot have many winners in your portfolio; you need to find one, two, maybe three.

If Warren Buffett says that in his 60 years of investing, he has found only 12 companies that have given him most of his returns, then if you're Warren Buffett and all you do every day is read company reports, you find one company every five years. You and I are not Warren Buffett, but we can probably hope to find one every five to 10 years. At Xillion, our goal is to help you find your own niche company that can also become great.

A big thing going for Nvidia is that their founder is still there. Just yesterday, Chandan and I were talking about it. Jensen Wong appeared on a podcast clip, and the interviewer asked him, 'If you were 30 today, what would you do?' He said he would not start a company because it's a million times more difficult than you can imagine. I know that firsthand as a founder. But the fact that he's still there, even though it's so difficult, is what makes Nvidia great. He's not looking for a golden parachute or to retire in Hawaii. Every day, he deals with really, really difficult stuff and still shows up day after day. That's what makes companies great. Tesla and Facebook are examples; I'm not a fan of Facebook, but Mark Zuckerberg is still there, still executing.

So, Nvidia still has that edge. I think Intel and AMD will get there, but maybe in three to five years. By then, most of the profit would have been taken by Nvidia, right? The industry would have saturated. Nithan asked a question about the addressable market. Let's say AI has an addressable market of $200 billion; Nvidia is going to take about 50% of that market, and everyone else will take the rest. It'll be like Apple versus Samsung versus LG. There'll be one or two big winners, and everyone else will take a smaller piece of the pie.

Any questions? This more or less concludes what we were trying to share. We're open to all questions. At Xillion, we can help you find companies early in their journey so you can ride them for the future. No guarantees that we'll help you find the next Nvidia, but we will help you find some decent stocks that, if you hold for five to 10 years, are likely to give you good returns.

Are your suggestions going to be tech-specific? One thing I promise you: I will not recommend any utility stocks, and I will not recommend any retail stocks. We'll focus on emerging, growing sectors. If you want to buy utilities and enjoy 4% returns per year in dividends, great, but we're not going to recommend that. The chance that PG&E, the most hated company in California, can become a 10x company? No, it can never become a 10x company; it's barely going to survive. Your local utility company or retailer, like a grocery store or Walmart, will just keep chugging away but won't see explosive growth. Growth is actually in sectors like tech, biotech, and pharma, especially.

In a lot of the genetic medicine companies, there's a lot of growth. Any other questions? One more thing to keep in mind is that if you want to invest in a big, growing company to get thousandfold returns but can't find one, it's not the end of the world. Until last year, 50% of my 401(k) was in the S&P 500 and the other 50% in the Growth Index, and I did well. If you don't want to deal with picking individual stocks, just invest in the S&P 500. Over the long term, it gives you about 10% returns. Or you can invest in a sector index like tech or even the NASDAQ 100. Fidelity and Vanguard tech sectors have given about 15-20% returns over the last 10 years. We also offer these index funds on Xillion. So if you missed out on buying Tesla or Nvidia, you can still benefit from their gains by investing in these indexes.

Now, in terms of returns, if you buy real estate, you're looking at about 4% returns per year on average. Corporate bonds give about 5%, the S&P 500 gives about 10%, growth stocks about 15%, and venture capital about 20%. If you have more than a million dollars, you should start investing in venture capital, and we can help you with ideas on that front. We also have a nifty tool on Xillion where you can project how your money will likely grow over time.

You can start your one-month free trial today at Xillion. If you have questions for Chandan or me, feel free to ask. Now, about passive income from real estate: passive income is very expensive. For example, to buy a $500,000 home in the U.S., it'll generate about 1/20th of that price in revenue, which is not even profit. After you pay your mortgage and other expenses, the actual income is much lower. The best form of passive income, especially if you're under 40, is to invest in the stock market now. In about 15 years, you can start selling those assets, and the growth will take care of everything for you. Tax strategy is key in real estate, and we have wonderful tools to help you navigate that.

Within Xillion, you can check out our real estate investment tool. It helps you figure out whether investing in some real estate makes sense for you. We offer great tools that show you tax treatment, potential rent income, and monthly mortgage payments. We even compare that with the S&P 500 to tell you whether real estate investment makes sense for you. However, real estate is only good if you can leverage it with borrowed money. Given today's interest rates, that's becoming more difficult.

Regarding tax strategies, it's important to be mindful of taxes, especially when selling stocks. Long-term and short-term gains are taxed differently. However, I've always been more of a topline investor rather than focusing on the bottom line. If you overly optimize for taxes, you might give up on gains. For example, Wealthfront claims to offer tax benefits through investing, but their performance since 2012 is only 7%, which is less than the S&P 500. So, in my view, it's better to find great American companies to invest in and hold them for the long term. This approach has worked for me and many others. The stock market is a great way to build wealth over time. If your income is high, consider investing in real estate when interest rates come down a bit.

Keep in mind, real estate isn't really passive income. It requires a lot of time and effort. I own a couple of properties myself, and it's definitely not hands-off. You'll often find yourself having to manage various issues.