Nvidia Stock Surges 140%, Boosts Insider Wealth in 2024

Key Takeaway

• Nvidia's stock has surged over 140% in 2024, significantly boosting the wealth of insiders and employees holding shares.
• Employees benefit from various equity compensation types like RSUs, ISOs, NSOs, and ESPPs but must navigate complex tax implications.
• Financial advisors recommend disciplined selling strategies and diversification to manage risks associated with high stock concentration.

Nvidia's Stock Surge

Nvidia's stock has experienced a remarkable rise in 2024, jumping more than 140% year-to-date. Over the past three years, the share price has surged nearly 580%. This rapid ascent has significantly benefited employees and insiders who own shares. For instance, Tench Coxe, a member of Nvidia’s board, sold 100,000 shares earlier this month, netting nearly $120 million. He acquired these shares back in 1997, prior to Nvidia’s public debut, through a "purchase from issuer/option exercise," according to a regulatory filing.

Blair duQuesnay, a certified financial planner and financial advisor at Ritholtz Wealth Management, commented on the situation: "I was thinking of Nvidia and its employees and what it must be like to get stock options in companies that are up 570% in the last three years – and I love the idea of selling into strength." She emphasized the importance of having a disciplined strategy for selling shares, noting, "You're not going to sell your shares on the absolute top day for the stock, so what you have to do is come up with a strategy that allows you some discipline."

Equity Compensation Varieties

Nvidia offers several types of equity compensation to its employees. Restricted Stock Units (RSUs) provide workers with shares at a future date following a vesting period of typically three to five years. Employees are subject to taxes once their holdings vest and they receive the shares. Incentive Stock Options (ISOs) allow employees to buy a specified number of shares at a stated price. While workers don't pay taxes on ISOs when they are granted, they may be subject to the Alternative Minimum Tax (AMT) the year they exercise the options. This AMT applies to the difference between the strike price on the options and the fair market value of the stock.

Nonqualified Stock Options (NSOs) are another form of equity compensation. At exercise, recipients are subject to ordinary income taxes on the "spread" or the difference between the fair market value and the strike price. There is a second tax hit – this time, capital gains – if the shares appreciate and are sold. Finally, companies may also offer Employee Stock Purchase Plans (ESPPs), wherein workers can buy shares at a discounted price – typically up to 15% – through a payroll election. Employees in these ESPPs are also subject to certain holding periods before they sell.

Timing and Diversification

The decision of when to exercise stock options and sell shares is crucial and varies on a case-by-case basis. Albert J. Campo, CPA and president of Campo Financial Group, advises that a good time to exercise and buy might be when the stock is down slightly. "What most financial advisors should be doing is setting up alerts for when the stock is down a couple of points, so that the bargain element is lower and it's a little cheaper to exercise," he said. He also emphasized minimizing AMT exposure when dealing with ISOs.

Blair duQuesnay highlighted the importance of timing share sales and being aware of tax implications: "If you're realizing income, be aware of what tax bracket that will put you in at year-end. Sometimes the gains are so high, you're going to be in the highest tax bracket and that can't be avoidable." Employees holding sizable equity compensation must also consider the risk of overexposure to their employer. Coordinating with an accountant and a financial advisor to thin out holdings through periodic sales and diversify portfolios is advisable. Campo pointed out the risks of overexposure by referencing Peloton Interactive's dramatic stock decline from $171.09 in January 2021 to $3.64 recently, stating, "You hitch your wagon to something you hope is going to skyrocket, but then what if it bottoms? Planning is key."

Street Views

• Blair duQuesnay, Ritholtz Wealth Management (Cautiously Optimistic on Nvidia):

  "I was thinking of Nvidia and its employees and what it must be like to get stock options in companies that are up 570% in the last three years – and I love the idea of selling into strength. You’re not going to sell your shares on the absolute top day for the stock, so what you have to do is come up with a strategy that allows you some discipline."

• Albert J. Campo, Campo Financial Group (Neutral on exercising stock options):

  "What most financial advisors should be doing is setting up alerts for when the stock is down a couple of points, so that the bargain element is lower and it’s a little cheaper to exercise... With ISOs, the question is ‘How do we expose you to as little AMT tax as possible?’"