Nvidia’s stock performance has been ‘staggering.’ But recent buyers of the stock are taking a far greater risk than they realize
Geoff Colvin
Sat, 2 November 2024 at 5:00 PM SGT4-min read
Jensen Huang has overseen a stellar rise in Nvidia's stock.
Nvidia has become the combined Taylor Swift and Shohei Ohtani of stocks – glamorous, constantly hitting the ball out of the park literally and figuratively, attracting millions of delirious fans paying up to bask in their magic. Like Swift and Ohtani, Nvidia has racked up astounding stats: $2.5 trillion of market cap created in just 10 months, with investors feverishly trading its stock far more than any other. In a year, Nvidia has become a true star.
But the analogy to the entertainment industry breaks apart on the matter of what the fans are paying for. Acolytes of Swift and Ohtani buy expensive tickets for a few hours of galvanizing fun, while investors in Nvidia want their money back and then some. A close look at the data suggests long-term investors who buy the stock at recent prices are unlikely to get the returns they’re expecting.
The analysis is based on economic profit, also called economic value added (EVA), a fundamental measure that avoids distortions in the accounting that publicly traded companies must use. It’s centered on capital, how much it costs, and how well a company uses its capital to create profit. Research has found this method of analysis is more predictive than looking at earnings per share.