How Fidelity Growth Company’s Big Nvidia Bet Affects Its Valuation

Key Morningstar metrics for Fidelity Growth Company

• Morningstar Medalist Rating: Silver
• Process Pillar: Above Average
• Person Column: High
• Parent pillar: Above average

Fidelity Growth Company’s stellar leadership at FDGRX remains a major asset, but the fund is vulnerable if chipmaker Nvidia NVDA – a key holding here – fails to meet the market’s high expectations.

Steve Wymer has led this fund for more than 25 years, making him not only one of the longest-serving large-growth managers in the industry, but also one of the most talented. Despite the fund’s vast asset base, Wymer has implemented its process without delay and consistently outperformed its competitors in the rapidly growing Morningstar Category.

The fund is increasingly defined by Nvidia, the graphics processor leader that has recently become one of the most valuable companies in the world. Since the stock became the portfolio’s top holding in 2016, its market value has increased more than 100-fold, thanks in large part to its recent stellar results. Due to the outperformance and despite the reduction by Wymer, the share of the portfolio has doubled in the last two years to around 16% of assets (as of September 2024). That’s a huge position size in absolute terms and relative to the stock’s 11% to 13% share of relevant high-growth indices.

The stock is riskier than most. Although the company is in excellent financial shape, its valuation today depends on the emerging and rapidly growing artificial intelligence GPU end market, where the emergence of alternatives or increased competition are plausible concerns, according to Morningstar’s equity analyst team. Nvidia’s business has historically been prone to boom-and-bust cycles that rocked its stock price.

But this fund has never presented itself as harmless. Wymer has long been willing to accept profitless companies that he believes have exceptional growth potential – particularly in the biotech industry – which can produce sharper declines than the Russell 1000 Growth Index (the category benchmark) during market declines. Although many of these up-and-coming hopefuls have fizzled out over the years, Wymer has demonstrated a knack for identifying big winners early and investing in them successfully.

The fund’s weight is a disadvantage in that it prevents Wymer from moving quickly or holding large positions in the names it prefers without exceeding ownership limits. Nevertheless, the fund, which has long been closed to most new investors, remains an exception.

Fidelity Growth Company: Performance Highlights

From Wymer’s inauguration in January 1997 through November 2024, the fund posted an annual gain of just over 13.0%, far exceeding the 10.4% of the Russell 1000 Growth Index and the average high-growth peer.

Wymer’s preference for fast-growing stocks and his willingness to stick with relatively expensive products have increased the fund’s volatility, as measured by standard deviation, relative to its peers and the benchmark. Nevertheless, the fund has typically delivered risk-adjusted results that outperform the benchmark.

The fund’s relative performance has been remarkably consistent under Wymer. Since its inception, three-year monthly rolling returns have exceeded top returns 90% of the time and have landed in the top quartile of the category almost as often.

Because the fund is typically sensitive to the market’s daily gains and losses, it stumbles more during declines than most other funds, but performs positively. This partly explains its success so far in 2023 and 2024 through November, when the 36% return significantly exceeded the index’s 32%. But it was the standout gain from Nvidia, the strategy’s largest holding, that accounted for much of the outperformance. A handful of other high-flyers like Deckers Outdoor DECK and On Holding AG ONON also helped.

On the other hand, the strategy’s above-index biotech holdings have performed poorly over the past half-decade as the industry has posted paltry returns – or losses in the case of smaller-cap biotech companies like those traded in this fund.