🧠 NVIDIA's Valuation


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Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better.

Today's Issue Read Time: <3 minutes

  • Lesson: NVIDIA's not-so-crazy valuation
  • Timeless Content: Why company swag should matter to investors
  • Thread: Looking at Crowdstrike's valuation
  • Resource: A 401(k) primer
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Friends,

Over the past 18 months, NVIDIA has made a lot of investors very wealthy. A $50,000 investment in November 2022 is now worth over $300,000. (Note: none of us Brians were smart enough to make this move.)

If you look at traditional valuation metrics, it might seem like you've missed the boat on this one. Consider NVIDIA's most-watched valuation metric: its Price-to-Earnings (P/E) ratio. This figure was recently in the triple digits. Even after its blowout earnings it still clocks in at well over 60:

But here's something we harp on a lot here: the market is forward-looking. The past only matters insomuch as it informs what the future might look like.

What happens if we look at today's price versus what analysts expect the company to earn over the next 12 months (its "forward" P/E ratio)? That metric clocks in around 37 -- still not cheap, but much more reasonable.

Even then, we have to remember analysts are far from perfect. At the same time last year, analysts underestimated NVIDIA's full-year earnings by over 50%. If we assume a more modest 20% under-estimation, it would push its forward P/E ratio even lower:

  • Forward P/E ratio (adjusting for analysts' errors) of about 30 -- very reasonable given current growth rates.

Look, we aren't saying that NVIDIA is cheap. We're also not saying we're going to go out and buy the stock.

What we are saying: investing seems easier when we look backwards. We have actual numbers to look at. Investing seems harder when we try and guess what's going to happen in the future. But it is in trying to tackle this harder task that great investing returns are born.

The one silver lining for us: the task isn't quite as daunting if you focus on the uber-long-term (think: decades). Bet on things that never change -- like people paying for convenience, lower prices, greater selection and freedom -- and investing in the companies that are delivering those things.

Over the long run, just getting this part right is enough for fantastic returns.

- Brian Feroldi, Brian Stoffel, & Brian Withers


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One Piece of Timeless Content:

Often, great companies defy the status quo. You can frequently see evidence of greatness when researching a company's culture. This blog post from Permanent Equity CIO Tim Hansen explains why company-funded swag could be a sign of an outstanding investment.


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One Resource:

Does your workplace offer a 401(k) plan? If so, you have access to a great way to invest on "autopilot." Check out all the ins and outs of this ever-popular investment vehicle in this article: What Is a 401(k) and How Do They Work?​


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Long-Term Mindset

I teach investors how to analyze businesses. Each Wednesday, I share six pieces of timeless content that can be read in less than 2 minutes. Read by 100,000+ investors from a16z, Amazon, Google, Microsoft, and more.

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