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Nvidia is a high flyer making all-time highs.
The story of its brilliant CEO Jensen Huang and the birth of the most important tech business in decades has been told by the man himself in this excellent interview.
As a practical operating investor and index developer, choosing the very best businesses to include in the North Tech Capital Global Technology Growth Index is key to outperforming Wall Street.
After passing through an initial filter (phase 1), the analysis of a business’s earnings becomes the most important aspect of security analysis. Today’s post is a short-form introduction of how you can begin to:
- understand the investment philosophy of North Tech Capital
- understand how to assess a stock’s earnings
The Phase 1 filter
This is the easy part.
To be included for serious analysis and in-depth scrutiny, each stock must pass through the following filter:
- it must be a large-cap tech stock
Nvidia’s earnings v the rest of the pack
The following figures are taken from Stockopedia, one of the components in my tech stack that provides the most accurate financial and statistical data on global stocks.
For expediency, I’ll simply list the compound average growth rates (CAGR) over the past seven years of reported annual earnings from the top twenty names in the NASDAQ 100.
If you’re a visual learner like me, this exercise will clearly show which stocks have ‘earning power’ as Warren Buffett describes it.
- Nvidia: 51.2%
- Netflix: 35.6%
- Amazon: 23.9%
- Broadcom: 23.2%
- Alphabet: 22.2%
- Microsoft: 18.4%
- Adobe: 16.2%
- Costco: 15.7%
- T-Mobile: 15.5%
- Apple: 15%
- Meta: 14.8%
- AMD: 9.82%
- QUALCOMM: 5.51
- Texas Instruments: 4.97%
- Tesla: 1.80%
- Linde: -1.70%
- Cisco: -1.96%
- PepsiCo: -5.62%
Graham and Dodd on earning power
Earning powers as a weapon of choice in security analysis can’t rely upon past-performance alone as noted as early a 1934:
It is not sufficient to know what the past earnings have averaged, or even that they disclose a definite line of growth or decline. There must be plausible grounds for believing that this average or this trend is a dependable guide to the future
Graham and Dodd, Security Analysis
Graham and Dodd raise an obvious question that needs answering in the present context.
How can you determine Nvidia’s (or any stocks’) future earnings as dependable?
But before this question can be answered, bear in mind what Graham and Dodd say further about earning power:
…the concept of “earning power”, expressed as a definite figure, and the derived concept of intrinsic value, as something equally definite and ascertainable, cannot be safely accepted as a general premise of security analysis
Their point is that intrinsic value need only be ‘adequate’ to justify the purchase of a stock or ‘that the value is considerably higher or lower than the market price.’
Nvidia’s earning power
Nvidia’s earning power comes from its competitive advantage as evidenced by the fact that all other global tech businesses are still scrambling for Nvidia’s chips.
Nvidia is the picks and shovels merchant in the global AI gold rush.
Their latest AI chip called Blackwell retails for $30,000 at the low end and up to $70,000 each at the high end depending on the model.
On a recent analyst call, Nvidia Chief Financial Officer Colette Kress said that 13,000 Blackwell chips have been shipped to customers.
CEO Jensen Huang commented that demand for the company’s Blackwell chip is “insane” in a recent TV interview.
CEOs have a habit of talking up their game, but when it is backed by exponential growth in earnings like Nvidia, the ‘trend dependability’ of earning power that Graham and Dodd argue for becomes easier to ascertain.
When appetite begins to cool for its tech, Nvidia’s earnings growth will slow, and so will its earning power.
Hint: we’re not there yet.
P.S. If you enjoy tech stock investing lessons like this one, check out the newsletter helping investors outperform Wall Street. Subscribe now.
