Investors have changed little over the past 30 years. They still clamor for growth stocks, especially those at the forefront of technological developments. This is especially true today of companies that are working to develop artificial intelligence. And one such company, Nvidia (NVDA), has come from relative obscurity just a few years ago to become one of the largest and most popular companies in the world among investors. But as challenging as it is to become one of the best, staying at the top can be even more difficult.
In 1993, Intel (INTC) was one of the largest and most highly regarded tech companies. Famous for Moore’s Law, an observation that says that semiconductors can get 40% faster every two years through advancements in technology, the company provided computer chips to nearly every major computer manufacturer. Intel Inside was a sticker companies wanted on their products, and just like Nvidia today, Intel’s products were used by the best companies producing the best technologies. As an analyst working at a growth stock investment company, there wasn’t a mutual fund that we offered that did not contain shares of Intel. And to put things in perspective, a $10,000 investment in 1993 would be worth $100,000 today. That’s not too shabby if you had the wherewithal to buy and hold Intel over the past 30 years.
In contrast, there was another chip company back in 1993 that wasn’t nearly as popular, especially among growth investors. The company was roughly the same size as Intel. But this company’s executives didn’t care about Moore’s Law, and they certainly never lost sleep about how many transistors could fit on a computer chip—that’s because their chips are not made from silicone, but from potatoes. Pepsi (PEP), the maker of soft drinks and snack foods like Lays Potato Chips, was boring as a company and as an investment. As a 24-year-old investment analyst, I ate potato chips, but I certainly didn’t want to invest in them. At the fund company, we may have had one mutual fund with an investment in Pepsi and most of us thought about it as an investment for old people who want dividends, but not for anyone who wants to grow their portfolio. Ironically, however, $10,000 invested in that unglamorous chip company would be worth $165,000 today.
The point is that some of the best investments are not in the most glamorous, popular, or exciting companies. But good companies, regardless of industry, often produce products and services that are highly profitable. And because many of these companies are “boring” they have few challengers trying to steal market share from them. When was the last time you heard about some startup trying to take down Pepsi? On the other hand, with microchips that sell for $25,000 apiece, every company even remotely tied to tech is trying to chip away at Nvidia’s lead. This is not to say that Nvidia is going to fall apart, or that the stock is going to tank. But it is to say that the combination of high profits and high profile can be challenging to maintain. The good news is that we don’t have to pick just one—Nvidia or Pepsi—we can have both … and we do.
~ Travis Raish, CFA