Pain or Gain Ahead of NVIDIA ETFs?

The leading semiconductor company and the artificial intelligence (AI) king NVIDIA NVDA plunged 9.5% on Tuesday, wiping nearly $300 billion off the chipmaker’s market cap and pulling chip stocks down with it. The VanEck Semiconductor ETF SMH, an index that tracks semiconductor stocks, was off 7.5%, marking its worst day since March 2020, per CNBC.

According to a recent asset allocation report from Tiger 21, an exclusive network of ultra-high-net-worth individuals and entrepreneurs, over half of its members are not invested in NVIDIA, as quoted on CNBC. The report revealed that 57% of members have opted out of Nvidia, due to concerns about its sustained growth and market dominance.

Reasons for Avoidance

Michael Sonnenfeldt, chairman of Tiger 21, highlighted reasons behind members' reluctance to invest in NVIDIA. Despite NVIDIA's current leadership in AI technology, some members fear that its growth may slow down as competitors catch up.

A Motley Fool article revealed that NVIDIA’s revenue growth will slow down from the triple-digit pace at which it has been growing recently. The Zacks Consensus Estimate for NVDA’s current-year revenues is pegged at $122.2 billion, up 100.6% year over year. The next year’s revenue estimate is pegged at $165.7 billion, up 35.6% from the current year.

NVIDIA’s earnings estimate for the current year is pegged at $2.76, up 112.3% year over year. The next year’s earnings estimate is pegged at $3.52, up 27.5% from the current year. Hence, we can expect a growth slowdown in NVIDIA next year, although it appears strong in the current year.

Overall Portfolio Allocation

The asset allocation of Tiger 21 members predominantly includes private equity (28%) and real estate (26%), despite challenges such as high interest rates. Public equities, including selective tech investments like NVIDIA, make up about 22% of their overall portfolios. Among the 43% who do hold Nvidia shares, many are hesitant to increase their holdings due to perceived high valuation risks.

Inside NVDA Stock’s Valuation

NVIDIA stock’s Price/Earnings (P/E) ratio (trailing 12 months) stands at 54.01X versus the underlying Semiconductor - General industry’s P/E of 8.97X. The last five years’ growth rate for NVIDIA was 54.20% versus the underlying industry’s growth rate of 9.10%. This exponential growth rate of NVIDIA explains its ripe valuation.

For the next five years, NVIDIA’s growth rate is expected to be 41.70% versus the industry’s growth rate of 17.80%. With slower growth expected for the coming fiscal years, NVIDIA's forward P/E ratio would decline.

Per Motley Fool, “if it were to grow revenue 30% in fiscal year 2028, a multiple of 30 to 40 times on the stock in 2027 would seem reasonable. That would value the stock between $200 and $270 per share in three years. As such, there is a good possibility that Nvidia's stock could once again double from where it is now in three years.”

NVDA ETFs in Focus

If you are worried about NVIDIA’s prospective slowing growth trajectory and still take advantage of the AI boom, you can stay invested in the NVDA-heavy semiconductor exchange-traded funds (ETF). The ETF approach minimizes the company-specific concentration risks.

Some NVIDIA-heavy ETFs include Strive U.S. Semiconductor ETF SHOC, VanEck Vectors Semiconductor ETF SMH, Technology Select Sector SPDR Fund XLK, Grizzle Growth ETF DARP and TrueShares Technology, AI and Deep Learning ETF LRNZ.

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