All Posts

Not Every Stock is the Next Nvidia

Not Every Stock is the Next Nvidia
Do more with what you’ve earned.

Financial advisors for successful professionals, executives, and business owners.

Nvidia has been on an absolute tear this year, up 185% YTD. It has beat analysts’ lofty expectations, and as a result, the stock has rallied. The AI adoption craze is sweeping the world. 

This has lifted other large-cap growth companies – MSFT, GOOGL, AMZN, etc.- who are also experiencing an excellent year (albeit not quite as excellent as Nvidia’s). 

In case you haven’t heard, Nvidia is now the largest company in the world, with a market cap of ~$3.4T. 

To put Nvidia’s market cap value into perspective – Nvidia is now larger than Berkshire Hathaway, Tesla, Costco, Johnson & Johnson, Netflix, Coca-Cola, Pepsi, Disney, and Goldman Sachs. COMBINED.

Nvidia’s market capitalization surpasses the GDP of many countries. For example, the UK has a GDP of $2.67 trillion, while Russia’s GDP is $2.24 trillion. Nvidia’s market cap is approximately $3.4 trillion, on par with India’s GDP.

One of the biggest beneficiaries of Nvidia’s impressive stock rally is its employees. Many Nvidia employees have likely become millionaires, which is a great outcome for those who took the risk of receiving part of their compensation in stock.

Let’s explore what this means for stock-based compensation.

Level 10 Gains

Let’s start with some real-world examples to illustrate the staggering growth of Nvidia’s stock. Suppose you joined Nvidia five years ago and received stock grants as part of your compensation package. Here’s how much those grants would be worth today:

  • Mid-Level Product Manager: If you were granted $77,000 worth of stock annually over four years, your initial grant alone would now be worth approximately $10.6 million.
  • Senior Software Engineer: With an annual $102,000 stock grant over four years, your initial grant would now be valued at roughly $14.8 million.
  • Junior Marketer: Even with a more modest $31,000 annual stock grant over four years, your initial grant would have grown to about $4.5 million.

These figures are not just impressive; they’re life-changing. They demonstrate the potential of stock-based compensation to create significant wealth, which is why many employees join companies offering such benefits. Stock-based compensation can accelerate your path to financial independence. However, there’s more to the story.

Financial planning that matches your ambition.

Financial advisors for successful professionals, executives, and business owners.

Luck and Survivorship Bias

While these examples are compelling, it’s crucial to recognize the role of luck in stock-based compensation. Nvidia’s success story is an outlier; many other companies have not seen similar growth. In fact, most have not. This introduces the concept of survivorship bias—focusing on the winners and ignoring the many who did not succeed.

It’s hard to ignore the success of companies like Nvidia and Microsoft. It’s hard not to tell yourself, “If I joined them five years ago and received stock options or RSUs, my life would be completely different today.” 

To help you overcome this bias, it helps to understand how all of the other companies have performed. 

Studies have shown that companies with high levels of stock-based compensation often underperform. From 2010 to 2022, companies in the top decile of stock-based compensation expenses (those companies that compensate their employees more with some form of equity (stock options, RSUs, ESPP, etc.) had annualized total returns of 5.8%, compared to 11.9% for the Russell 3000 index​ (Nixon)​​ (Corporate Finance Institute)​. In contrast, the bottom decile, those with little to no stock-based compensation to their employees, performed the best. 

The two biggest factors driving the lower rates of returns are the dilution of shares and the employees’ focus on short-term results (short-term stock price performance vs. long-term company health).

High Salary vs. Stock-Based Compensation

Focusing on a high salary might be a more reliable path to wealth. Here’s why:

  1. Predictability: A high salary provides a predictable and stable income. You can plan your finances, invest in diversified assets, and avoid the volatility of the stock market.
  2. Risk Management: Stock-based compensation ties your financial well-being to a single company. If the company underperforms, your compensation could be significantly impacted. A high salary allows you to manage risk more effectively.
  3. Flexibility: With a high salary, you have the flexibility to invest in various assets, reducing the impact of any single investment’s poor performance. You’re not putting all your eggs in one basket.

Which Equity is Important?

It might sound like we’re not fans of equity-based compensation plans, but that’s not true. In fact, we are big supporters. However, it’s crucial to understand the risks involved. If you participate in such a plan, a simple way to mitigate risk is to quickly diversify out of the stock and into your long-term portfolio.

We’ve seen this strategy work well for our clients. For instance, one client held a biotech stock that underperformed. As her RSUs vested, we sold the stock and invested the proceeds into her Bull Oak investment portfolio. Over the past four years, her company stock dropped by about 90%, while her investment portfolio has grown substantially.

Remember, not every company is the next Nvidia, so it’s wise to plan accordingly.

Schedule Meeting


Free Subscription

Learn how you can capitalize on the economy’s changing tides with a pragmatic approach to planning and investing. Get a free bi-weekly email with expert insights from Bull Oak’s wealth management team.