Hacker News Reader

Comment by FredPret | Hacker News Reader

Nvidia has seen a fantastic, geometric increase in profit [1]. This is exactly the kind of thing growth investors hope for.

However, their PE ratio is currently 93. This is the kind of PE growth investors buy at, hoping for geometric earnings growth to kick in, not the situation after such growth has taken place.

Which means they'll have to keep 2x-ing that profit for a long time to come.

It could be doable but I don't see it. Even if they completely absorb Intel and AMD's market share, it doesn't make sense.

[1] https://valustox.com/NVDA

View on HN

Is it always about earnings? The market is all about speculation and trust. Unless a competitor obliterates them, I don't see their stock tanking more than 10%. Look at Apple, Google, or even Boeing. Boeing's doors are flying off the planes yet their stock is still higher than October 2023 crash. Nvidia can just go for a stock split and take care of the numbers quickly.

It's about earnings (freshly made money) and equity (existing money) and growth potential (future money).

One way or another, they need to have money in order to distribute it to me, the investor (through dividends or buybacks).

At a valuation of 90x earnings and only $0.02 in equity per dollar of market cap, I have to pay an insane premium to acquire:

- an anemic stockpile of equity ($50b in assets - $22b in liabilities = $28b in equity. Yours for only $1500b!)

- a tiny cashflow of 1/90 of my investment

- admittedly big growth potential

So the question is - how big is that growth potential? I bet it's not high enough to justify 90x earnings.

Unrelated question: Do you have any stocks you are following and expecting to go high soon?

I'm always careful to calibrate my expectations to "one day far in the future this might work" versus expecting highs soon.

I recently exited positions in US Steel and Encore Wire which were selling for single-digit PE ratios and with >$1 equity per $1 market cap at the time. My plan was to hold them forever, but the price just shot up so much and there are other things to buy.

I like really boring businesses like banks, utilities, airlines that can trudge along for decades if they have to before I get my return. When you catch them in a bad news cycle, you can pick up a solid business for less than it's worth.

Don't take financial advice from hacker news. Go to the bogleheads wiki, get a handle on your personal finances, then invest using a standard 3 fund spread in index funds. Picking individual stocks is just gambling.

This is great advice for most.

But the more people who do this, the more overvalued the indexes will become, and the more capital-starved the non-index companies will become (even though they are still very good businesses!).

Don't hate the player, hate the game.

I’m not saying you’re wrong or should do it my way!

Just explaining why I’m taking the road less travelled.

Don't take this advice unless you want massively subpar returns. The idea that picking individual companies is "gambling" is quite frankly ridiculous. The information around NVidia being a great company has been around for years and years and was obvious to anyone who took a look at the company performance.

The same is true for companies like Netflix or Shopify. I invested in all three of the these companies for the first time in around 2013 and 2014, why? Because I did my research and due diligence and could see they were incredibly well run, operating in areas with lots of room for growth.

If I had just invested in index funds I would much, much less money than I do now.

If you're reading this comment and you're younger than 60, do not take this advice. Your risk tolerance should be higher when you're younger and buying good companies at good prices is not gambling, it's what Warren Buffet always did, and it's the best way to grow your net worth.

A lot of shit can happen to individual companies that is unanticipated or unlucky. For example, Boeing had been a pillar of American engineering for a long time. We had no reason to doubt that the producer of one of the most prolific and reliable jet liners would ever have any issues, but then it did. The facts are that it is incredibly hard to predict the trajectory of individual companies even with insider information. The hedge against acts of God is diversification, and the best way to do that is index funds.

Frankly your advice of do your own research and only invest in "good" companies is incredibly irresponsible advice. That you survived and did well is not proof that your strategy is good, just that you in particular are lucky. The most reliable way to grow and preserve wealth is diversity.

Well I guess I've been lucky for ten years in a row then. Maybe you should tell Warren Buffet he got lucky too.

Doing research and investing based on it isn't being lucky. It's called being prepared. Rolling a dice and picking stocks and then making money IS being lucky.

If you massively diversify you are just going to get whatever the market gets and no alpha. If you are close to retirement, this makes sense. But for young people, generally your risk tolerance is higher and you have more time too. Here it makes sense to learn about companies, research, do your due diligence, and invest in individual companies.

This can work out so great if you do it well.

In the legendary books Securities Analysis and The Intelligent Investor they recommend this approach if you are serious about researching and they also recommend diversifying into a variety of stocks - certainly more than 3.

Personally I like your approach much more and it’s why I’m building https://ultimatestockpicker.com.

I feel like there’s a ton of money rushing into the SP500 and it’s juicing the valuations far too high while there are great companies out there trading at a PE of 5-10.

Thank you for your insights.

And the easiest way to diversify is to buy index funds. In the long run you do far less work and you probably beat people picking stocks and trying to compete with extremely well resourced finance firms. The comment above you is a great example of survivorship bias. He picked well. That is rare.

FWIW, you can compete in arenas where extremely well resourced finance firms literally don't allocate people. The return on an obligated <5% ownership stake in a <$10Bn company isn't worth the attention of said firms, but is nice if your AUM is <$100mm (i.e. most individuals and approximately zero well-resourced finance firms).

I'm not saying it's the best thing to do: it's an allocation of time and energy that you could put towards literally anything else. Basically, it requires ongoing education and discipline, as most worthwhile things do. But it's a valid financial choice and the circumstances for success are less rare than you give it credit for.

It's a bit like concluding that it's not worth working for a startup because 90% of "startups" "fail", or whatever the quoted statistic is these days. The published and oft-discussed maps are not a complete representation of the actual territory – there's a lot of nuance in there.

At the end of the day GPU copmpute is a commodity. I just cant see how nvdia has differentiated itself in a way that will last a decade plus. Theres too much money on the line for every competitor to be asleep at the wheel here. Eventually a competitor will have a compelling product and then nvdia will have to slash prices.

What is their trailing P/E and what is their forward P/E?

Their trailing P/E has January 2023, where their earnings were 1.41 billion, and revenues were 6.05 billion. Their last quarter earnings were 9.24 billion, and revenues were 18.12 billion. Their earnings last quarter were 50% more than, not their earnings in the first quarter, but their revenues in the first quarter.

This is the right way to look at it. The P/E ratio of 90+ includes two quarters of relatively low profit before things really took off in the most recent two quarters.

Annualizing the forecast earnings for the next quarter leads to a P/E of 38. Still high, but not outrageous: https://www.thestreet.com/memestocks/others/will-nvidia-stoc...

What you're saying is equivalent to expecting the growth curve to continue for some time.

Forward PE hasn't happened yet and might never happen. Corporate earnings projections are numbers that come out of somebody's Excel and is justified by looking reasonable to an expert. It's a lot better than nothing, but I'm not betting the farm on that.

Wouldn't 2x-ing their profit over the next year get the PE down to half? Why do they need to 2x their profit for a long time to come?

Half is still crazy; 1/4 is what I would consider a little high (I'm a value investor). Especially for a tech company, I don't understand the rationale behind high valuations.

A high valuation makes sense to me if the asset will deliver a reliable cashflow over time, or if there's a high chance it'll start making much more cash in years to come.

More reliable / more growth = higher premium.

But tech companies come and go. Admittedly, Nvidia is more of an infrastructure company, but nobody can guarantee that they will be relevant 20 years from now, so even a PE of 20 seems risky to me.

Value investors often miss exponential/crazy growth stories.

I don’t care about missing stories; I care about overall performance over my lifetime. And on that metric, value investors rarely miss.

Reply on news.ycombinator.com