Key Points
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Nvidia’s winning stock returns are a direct result of the insatiable demand for AI hardware and software, which has lifted the company’s net income 29-fold in three years.
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Although Strategy is the world’s biggest Bitcoin holder, its one-of-a-kind business model relies on successful financial engineering that rubs certain investors the wrong way.
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The stock with the greatest upside is the one that requires a contrarian perspective from investors right now.
- 10 stocks we like better than Nvidia ›
Nvidia (NASDAQ: NVDA) needs no introduction. It’s at the center of the artificial intelligence (AI) boom, supplying industry-leading hardware and software for the infrastructure build-out.
Investors might have heard of Strategy (NASDAQ: MSTR). It’s a $32 billion enterprise software business that morphed into a Bitcoin treasury company.
Between these two stocks, whose recent performances are on opposite ends of the spectrum, which has a better chance of surging 10x by 2036?
Nvidia’s incredible financial gains have launched the stock
Nvidia has been the most impressive story in the economy and stock market. Its shares are up an astonishing 897% in the past five years (as of June 30). When investors think of the AI revolution, there’s no doubt this business is what comes to mind first. The company’s financial success is impossible to overstate.
Just in the last three years, from Q1 2024 to the first quarter of fiscal 2027 (ended April 26), Nvidia’s revenue soared 1,033%. Its graphics processing units, used to operate AI data centers, are perhaps the hottest piece of hardware the world has ever seen. Demand has been exceptional as Nvidia’s hyperscaler customers race to build computing capacity to meet their clients’ needs.
Phenomenal top-line growth has boosted the company’s profit. Net income totaled $58.3 billion in the most recent fiscal quarter. That metric was just $2 billion exactly three years before, translating to a monster 29-fold three-year rise. Nvidia’s pricing power plays a role here, as its gross margin was 74.9% during Q1.
Nvidia has a wide economic moat. The company clearly excels in hardware, but its CUDA software platform raises switching costs for developers. The combination of chips and dedicated software creates a robust ecosystem.
You’re forgiven if you think this AI stock is extremely expensive. But it’s not. Shares trade at a price-to-earnings ratio of 30.6. Considering Nvidia’s unbelievable revenue and profit growth, this is an attractive entry point for interested buyers.
Strategy continues to fine-tune its strategy
Strategy is the single largest holder of Bitcoin in the world. As of June 30, the business held 847,363 units of the leading cryptocurrency on its balance sheet. This is a Bitcoin treasury company that provides leveraged exposure to the digital asset for its shareholders. So, the stock price is more volatile than the crypto. Strategy shares trade 82% below their peak, while Bitcoin is 52% off its record.
In a bull market, though, the company’s stock is poised to be a monster winner. The digital asset reached an all-time high in October last year. In the five years leading up to that point, Strategy shares had skyrocketed 2,300%.
This company is not for faint-hearted investors. Shareholders are being tested right now, as Strategy’s critics continue to question the sustainability of the business model.
To be clear, Strategy is not in a precarious financial position. The Bitcoin it owns is worth $49.6 billion, which equates to 28 times the company’s annual combined dividend and interest obligations.
However, the management team is fine-tuning its operating playbook. It just announced a digital credit capital framework, with the main features allowing the business to repurchase its common stock and preferred shares and sell its Bitcoin stack when advantageous.
Strategy is a financial engineering machine. It funnels constantly debasing fiat currency into Bitcoin, a finite asset. The former depreciates perpetually, while the latter has appreciated tremendously in the past. Investors must believe that Strategy can take advantage of these contrasts to capture more value over time.
Choose your level of risk and uncertainty
If you’re not bullish on Bitcoin, then you’ll lean toward Nvidia. But the AI powerhouse isn’t without its own set of risks. Uncertainty stems from a possible slowdown in AI spending, which could happen if enterprises don’t see the returns they hoped for. Moreover, Nvidia’s major customers are developing in-house chips to become self-reliant.
There’s also risk and uncertainty regarding Bitcoin’s long-term adoption, which isn’t guaranteed, although I believe it has a bright future. And Strategy must operate with heightened focus on risk management.
Looking forward to a decade from now, I think Strategy has higher upside. This is supported by the view that it’s a leveraged position tied to Bitcoin. Should the cryptocurrency’s price rise 10-fold by 2036, a significantly smaller gain than what it achieved in the past 10 years, then Strategy should perform even better.
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Neil Patel has positions in Strategy. The Motley Fool has positions in and recommends Bitcoin and Nvidia. The Motley Fool has a disclosure policy.
