Call Me Crazy: I’d Invest in McDonald’s Over Nvidia

Graphics-chip maker Nvidia (NASDAQ: NVDA) seems like it can do no wrong these days. With its shares soaring past $900 recently, it wouldn’t be surprising to see them reach $1,000 soon. This is extraordinary considering shares were trading at less than $50 just five years ago. The semiconductor specialist, which has been benefiting from the boom in generative artificial intelligence (AI) as companies race to buy up its advanced AI chips, has become the ultimate Wall Street darling.

Nvidia shares undoubtedly deserved a big run-up given the chip-maker’s stellar business performance. The tech company‘s revenue soared 126% year over year in fiscal 2024, fueled by a 217% increase in its data center revenue. But the degree of the stock’s astronomical gains merits some skepticism.

To help illustrate the risks inherent in Nvidia shares today, I’d go as far as to say that even McDonald’s (NYSE: MCD) may be a more attractive long-term investment from here. The boring and mature fast-food burger chain’s more conservative valuation and predictable business arguably combine to make a superior value proposition for investors compared to Nvidia. While I recognize this may shock or even aggravate some Nvidia bulls, please hear me out. This isn’t a pitch for Nvidia shareholders to sell but rather a reminder that not every stock is right for everyone.

Valuation risk

On the surface, Nvidia’s price-to-earnings ratio of 77 seems more than justified by the company’s fundamentals. Not only did revenue more than double in fiscal 2024 but earnings per share soared 586%. With growth like this, investors may conclude that the company can easily grow into its stock’s valuation.

But investors have to give some weight to the possibility of AI chip demand slowing in the future and Nvidia’s operating profit margin taking a big hit. One main reason for the outsize gains in Nvidia’s earnings compared to its revenue was a huge improvement in operating margin. Surging sales led to Nvidia’s operating margin increasing from about 34% in fiscal 2023 to approximately 61% in fiscal 2024. While it’s encouraging to see the company’s operating margin increase, such a large boost in margin means there’s a risk of some moderate or even significant reversion for the key profitability metric at some point in the future. If supply and demand for Nvidia’s data center products become more balanced over time, for instance, unit sales growth could slow, chip prices could come down, and operating margin could compress all at the same time. There’s a risk, therefore, that future circumstances could lead investors to be more hesitant about paying 77 times earnings for the stock.

Compare this to McDonald’s, with its far more conservative price-to-earnings ratio of 24 and its more consistent operating margins. To its credit, the operating margin at McDonald’s has expanded from 42% before COVID to 46% today. But given how much slower and smaller its operating margin expansion has been than Nvidia’s, any reversion to the burger chain’s pre-COVID operating margin levels would likely occur at a slow and manageable pace (manageable for both management and investors) and would have a much smaller negative impact on profits. McDonald’s investors, therefore, would likely have plenty of time to react to the changing environment and they’d probably be compensated by the fast food king’s long-standing dividend (currently yielding 2.3%) while they re-evaluate the stock’s long-term prospects.

Visibility risk

Further, most people would likely agree that the pace of disruption and change is much faster in semiconductors than it is in fast food — particularly when comparing market leaders of both industries. To illustrate, look at the rise and fall of Intel stock, which reflects how the company’s once-dominant industry leadership has been easily eroded away by competitors like Nvidia, Broadcom, and others. Long gone are the days of Intel’s leadership. Over the last five years, Intel stock has declined 20% and Nvidia shares have risen more than 2,000%.

Meanwhile, McDonald’s has easily sustained a leadership position as a global restaurant chain for decades. Not only has its stock increased more than 50% over the past five years while paying meaningful (and growing) quarterly dividends to shareholders the whole time, but the underlying business continues to grow rapidly. Today, its strong growth persists. Gobal comparable restaurant sales rose 9% year over year in 2023 and increased 30% since 2019. The company’s scale, customer loyalty, and consistent service across its stores have created a wide and highly predictable “moat” for the business that keeps customers coming back and competitors at bay.

It’s safe to say that McDonald’s has an easier-to-predict business than Nvidia. The likelihood of a new competitor disrupting the burger chain is much lower than it is for a competition to make inroads on Nvidia’s semiconductor leadership. Further, the ramifications of potential negative outcomes, like Nvidia giving up its big lead over competition or slowing sales, could be disastrous for the stock given the risk of significant margin compression and the growth stock’s high valuation.

Don’t get me wrong. I could be drastically underestimating Nvidia. Indeed, there’s probably a high chance I am. However, history in the tech sector (particularly in the semiconductor industry) shows that there is a high level of unpredictability regarding how competitive dynamics can play out over time. For this reason, I firmly believe there’s greater visibility into the business at McDonald’s than Nvidia — enough difference that I’d rather bet on McDonald’s stock.

Sure, I would consider investing in Nvidia at the right price. But that price would have to be very attractive, leaving a meaningful margin of safety in my calculations about the company’s potential future. In other words, I’d consider buying Nvidia stock if I believed it traded at a significant discount to my estimate of its fair value. But its current price is far above the levels I’d need to see it trade at before shares seemed to trade with a sufficient margin of safety.

Risk and reward go hand in hand

This isn’t to say that McDonald’s stock will outperform Nvidia stock over the long haul. Instead, the point is that risk and reward go hand in hand. I’d argue that the potential reward investors can achieve from McDonald’s stock relative to the underlying risk of owning it makes for an overall better value proposition than Nvidia stock’s current risk-reward profile.

One final point: investors should remember that they don’t need to invest in every hot stock. It’s OK to sit on the sidelines and not participate in an investment if it seems too risky to them. Every investor is different. I, for example, would rather choose a stock with less valuation risk and more visibility than Nvidia — even if this means missing out on big potential gains. In the meantime, I’ll sit back with some popcorn and enjoy the show without judging those who have chosen to invest in Nvidia stock. Many people have higher risk tolerances than me and that’s OK.

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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Call Me Crazy: I’d Invest in McDonald’s Over Nvidia was originally published by The Motley Fool