With AI instigating potential robust growth and putting industry giants on their toes, significant factors are changing in the market. The most substantial jump witnessed recently was Nvidia’s 2nd quarter report, which documented the company’s 101% upward trajectory.
Is it time for you to invest in stocks like Nvidia (NVDA), or is there too much uncertainty for you? Keep reading to compare a low-risk vs. high-risk strategy with a booming company and a foundational ETF.
Low-Risk Compared to High-Risk
To dive into these two different mindsets, strategies, and levels of risk assessments, two separate potential investments need to be explored. To see low-risk and high-risk strategies, comparing a highly recommended ETF, VOO, and the trending AI stock, NVDA, is beneficial.
What is VOO? The Vanguard S&P 500 is an ETF that tracks and replicates the performance of the S&P 500 index.
What is NVDA? A tech company for top designers of discrete graphics processing units that enhance the experience on computing platforms.
First, let’s backtest using Equities Lab to see the market performance for these securities. The below image is the past year’s performance of VOO (grey line), NVDA (green line), and S&P 500 (red line).
It’s nearly impossible to see VOO because it follows the S&P so closely, demonstrating a steady, consistent security. On the other hand, NVDA is more volatile and has its ups and downs, with a very positive performance starting in January and completely crushing the market all the way up to today.
After backtesting over a 10-year period, the graph below shows the intensity of NVDA’s climb! You can barely see the line for the S&P and VOO. I bet you wish you would’ve invested in NVDA in 2014 (don’t we all)!
Looking at the time graph below, the fluctuation of NVDA and the unchangeability of VOO is clearly evident. VOO is nearly a perfect match for the S&P 500 every year, replicating it almost to a T. But NVDA? All the way up in 2016, then way down in 2018, going back up, then crashing in 2022. Today it is a stock that is predicted to maintain a significant role in the future of AI.
With the two separate securities, two wildly different behaviors are clear. One is consistent and steady, giving you an almost precise outcome. The other is irregular and changing but with a significant return rate if you invest at the right time.
Analyzing VOO against NVDA
The performance on the visual graph shows a stark contrast between the two securities. What does the performance look like regarding technical analysis? The following table was created on August 24, 2023, using Equities Lab and other accessible sources through the software.
| Analysis Components | VOO | NVDA |
|---|---|---|
| Risk Level | Low | High |
| Closing Prive | 406.95 | 471.16 |
| 52 Week Range | 318.63 — 422.15 | 108.13-481-87 |
| Market Cap | 0 | 1.154T |
| Volume/Avg. 30 Day | 3.245m/3.771m | 60.09m/50.03m |
| P/E | 0 | 240.81 |
| Dividend/Yield | $6.20 (1.5%) | 0.16/4 per 10,000 |
| EPS T12M | 0 | 1.93 |
| Piotroski F-Score T12M | 0 | 5 |
| Beta | 1 | 2.113 |
| Red Flags | Low F-Score, Low Cash Flow Score | Average market cap in top ten, EPS in freefall large-cap |
| Green Flags | None | Operating cash flow positive 4q, pegs more than 0 |
The components in the chart might make you raise an eyebrow.
Why does VOO have four zeros? VOO is an ETF, a basket of securities, so calculating financial ratios for an ETF is entirely separate from individual stocks. The numbers can be irrelevant or misleading for an ETF, so they are represented as a zero or a question mark.
Evaluating VOO’s metrics like Market Cap, P/E, EPS, Beta, and F-score could be conflicting. However, it isn’t a red flag that the ETF has zeros and question markets. Even the red flags listed aren’t truly red flags. It has a low F-score because you can’t evaluate the F-Score fairly and a low cash flow score because it’s not trying to make money. It’s simply reinvesting into the S&P 500 index. It has a low volatility and a consistent track record without attempting to be the world’s greatest ETF.
Why is VOO low-risk? VOO is a low-risk investment because it replicates the performance of the S&P 500 index, the 500 largest companies in the US, and the ETF has a long track record of profitable consistency.
Evaluating NVDA’s metrics is simpler because it is a single company. A Beta score of 2 means it will move at a 20% rate with the market, which is relatively high. If the market moves down 10%, NVDA will move down 20%, showing that it is volatile, which was already apparent. The other metrics, such as F-Score and green flags, speak positively about the performance, and with trading volumes averaging 60 million, others clearly agree. However, the sensitivity to the market makes it susceptible to positive and negative shifts. If you invest there is an inherent unpredictability.
Why is NVDA high-risk? NVDA is a high-risk investment because it has a history of volatility and depends on AI’s continued success, with an unpredictable future in the stock market.
What to Do?
The two securities demonstrate low-risk and high-risk strategies! Investing in VOO is a slow yet predictable success that will most likely increase by 12.9% yearly. Investing in NVDA is a rollercoaster of possibility and positive performance or potential disaster that could empty your pockets.
What is your investment strategy? First, you must determine the risks you want to take and the success you want to see. If you don’t want to take risks, VOO and similar investments are the way to go. If you like the up-and-down trading cycle, NVDA is a stock to look into, along with other potential booms.
There isn’t a right answer to what to invest in. However, NVDA might not be the way to go if you’re not interested in risk. If you want exponential growth within a quarter, VOO definitely isn’t the right answer.
What’s the takeaway? Use financial analysis tools, like Equities Lab, to determine financial ratios, visualize extended backtested performance, and stay informed. Better backtesting means you make informed decisions (not just trending ones).