Nvidia (NVDA -0.23%) has been a huge moneymaker for many investors in recent years. If you bought $10,000 of the graphics processing unit (GPU) maker's shares five years ago and didn't sell, you'd now have more than $333,000. If you invested the same amount 10 years ago, you'd have roughly $2.7 million.
However, Nvidia's share price has skyrocketed so much that some are nervous. They worry that the stock's premium valuation makes it much more risky. Those are legitimate concerns.
Is there a way to still profit from Nvidia anyway? Yes. Here's how Nvidia can make you money with less risk.
Safer than Nvidia stock
When many people hear the word "investing," they immediately think of stocks. That's understandable considering the amount of coverage the stock market receives in the news. Also, a recent Gallup survey shows that 62% of Americans are invested in the stock market -- either in individual stocks, stock mutual funds, or stock exchange-traded funds (ETFs).
But investing includes more than just stocks. There's another important way of investing that can often be overlooked -- bonds. Buying a stock enables you to own part of a business. Buying a bond enables you to loan money to a business.
Investing in bonds is generally considered to be safer than investing in stocks. Bonds tend to be less volatile than stocks. They also provide a fixed return instead of an uncertain return.
Buying Nvidia bonds is a safer alternative than buying Nvidia stock. You don't have to worry about share price fluctuation. If Nvidia's growth slows unexpectedly, it won't matter to you, as long as the company continues to generate enough money to repay its debts.
Less risk, but not no risk
Investing in Nvidia bonds entails less risk than buying the stock, but it's not a no-risk move. Bonds come with several risks, some of which are more applicable to Nvidia than others.
One significant risk right now is inflation. If inflation levels rise, the buying power of the interest you receive from Nvidia will be eroded.
Joined at the hip with inflation risk is interest rate risk. Should inflation rise, the Federal Reserve could decide to raise interest rates in an effort to bring inflation down (as the central bank did repeatedly over the last couple of years.) When interest rates go up, bond prices go down.
Nvidia bonds, like any corporate bonds, are also subject to market risk (sometimes called systemic risk). Major economic downturns, geopolitical turmoil, and other crises can cause bond prices to fall just as they do stock prices.
There are also some risks specific to Nvidia. For example, rating agencies could lower their credit ratings for the company, thereby increasing the risk of the bonds Nvidia has issued. It's even possible that Nvidia could default on bond payments.
Should investors worry about these risks? I don't think so. Inflation remains higher than anyone would like, but has been coming down somewhat. The Fed still predicts an interest rate cut later this year.
If you hold Nvidia bonds to maturity, you won't have to be concerned by fluctuating bond prices. Nvidia's strong financial position makes it highly unlikely its crediting rating will be lowered, and even more unlikely it will default on bond payments.
The big trade-off
There's one big trade-off associated with investing in Nvidia bonds instead of its stock: Your returns could be much lower. Just how big is this trade-off?
I looked at Nvidia bonds available for trading through my online brokerage. The current yields of these bonds ranged from 1.7% to around 4.7%. That pales in comparison with Nvidia's year-to-date share price gain of nearly 150%.
However, that brings us full circle back to the issue of risk. There's a real risk that Nvidia's share price could fall in the coming months. Its bond payments, though, should be dependable. Investing has always been -- and will always be -- a balance of risk versus reward.
