It’s understandable why so many investors have turned their attention to Nvidia: The stock has increased by more than 142% since the start of 2024.

The computer company reported earnings for its fiscal second quarter after the market closed on Wednesday, beating analysts’ expectations, according to estimates compiled by LSEG. Nvidia reported $30.04 billion in revenue for its fiscal second quarter, up 122% from the same period last year.

Nvidia investors may be getting used to this kind of news, as the company’s quarterly profits have beaten analysts’ expectations for six straight quarters.

It can be tempting to go all-in on a particular company after a wave of positive news. But before you spend your investment dollars, it’s important to understand key elements of the company, including what the company does and what gives it an edge.

Nvidia was founded on April 5, 1993 by Jensen Huang, Curtis Priem, and Chris Malachowsky. The trio had the idea to create computer chips that could bring 3D graphics to gaming and created its own graphics processing unit in 1999.

You may have heard of central processing units (CPUs). They are the fundamental building blocks of computers and can perform a wide range of tasks, such as running programs, opening files, and sending emails.

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According to Nvidia, GPUs, on the other hand, are more specialized and better able to perform more complex computing tasks and image rendering.

Nvidia used to focus primarily on producing chips for 3D gaming. However, almost every major tech company, including Google, Meta, and Microsoft, now uses Nvidia GPUs to power their own AI products and models.

“NVIDIA achieved record revenue as data centers worldwide ran at full speed to modernize the entire computing stack with accelerated computing and generative AI,” said Jensen Huang, Nvidia founder and CEO, in the company’s fiscal second quarter earnings report.

Because Nvidia’s chips are uniquely capable of calculating the complex algorithms that drive generative AI models, the company is benefiting from increased demand for AI-driven products.

According to data from Mizuho Securities shared with CNBC in June, Nvidia is estimated to dominate between 70% and 95% of the AI ​​chip market, which is used to train and power AI models such as OpenAI’s ChatGPT.

Nvidia has competition, though. AMD, a semiconductor company that also makes gaming GPUs, unveiled its new AI chips in June. Intel, which used to dominate the U.S. chip industry, announced its latest AI chips that same month.

Over the years, Nvidia has grown to a market cap of just over $3 trillion (as of publication on August 29).

However, that does not mean you should automatically invest.

When building your portfolio, it is important to get a clear picture of the company and find out if it has a competitive advantage in the industry it operates in. Additionally, think about your long-term financial goals and keep in mind how much risk you are willing to tolerate.

And remember that a company’s short-term performance isn’t necessarily indicative of how it will perform in the future. There are a myriad of factors that can cause a company’s stock price to fluctuate or fall without warning.

One low-risk way to get exposure to Nvidia is to invest in an index fund or exchange-traded fund that tracks the S&P 500. Your investment wouldn’t just go into Nvidia, but would also be diversified across hundreds of top companies like Microsoft and Google.

It will also diversify your portfolio so that a decline in one company doesn’t completely derail your performance. Plus, these types of funds tend to cost less because they simply mimic a market index like the S&P 500 and aren’t actively managed.

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