But the analogy with the entertainment industry diverges on what fans pay for. While Swift and Ohtani’s minions buy expensive tickets for a few hours of exciting entertainment, investors in Nvidia want their money back and then some. A closer look at the data shows that long-term investors who bought the stock at recent prices are unlikely to get the returns they expected.

The analysis is based on economic profit, also called economic value added (EVA), a key measure that avoids distortions in accounting that public companies must use. It focuses on capital, its cost, and how well the company uses its capital to generate profits. The research found that this method of analysis is more predictive than looking at earnings per share.

Economic profit analysis was collected on: LuckInstitutional Shareholder Services’ request’ ISP EVA shows that Nvidia is as superstar as it seems. You don’t need to be a financial expert to understand these numbers: Nvidia’s return on capital over the last four quarters was 140%, and its cost of capital was 9.3%. “It’s astonishing,” says Bennett Stewart, a pioneer of economic profit analysis. “It’s hard to see how they could get a much higher return on capital than that.”

Here’s how surprisingly Nvidia makes money. ISS calculates EVA data for 21,000 public companies worldwide and reports Nvidia at 100^This percentile for profitability. This doesn’t mean Nvidia is in the top percentile (which would be in the 99th percentile).^This percentile). This means Nvidia ranks above every one of the other 21,000 companies, or possibly tied with some of them.

But these remarkable figures reflect the past, and stock prices are based on the future. So the critical question for investors is: What are the chances that Nvidia will perform well enough in the coming years to justify the stock’s recent price of around $136? EVA can help answer this question.

We asked ISS EVA to calculate how fast Nvidia needs to grow economic profits over the next 20 years to justify its recent share price. Answer: 21.4%. Nvidia needs to increase its economic profits by 21.4% every year for 20 years. If it can’t do this, the recent stock price is too high.

So can he do this? No one knows for sure, but here are some numbers for context.

· Nvidia’s economic profit in the last four quarters was 46.2 billion dollars. By the 20th year, its economic profit would have to rise to $2.2 trillion.^This Only years to justify the recent stock price.

· The highest economic profit made by any company in 12 months is Saudi Arabian Oil Co.’s $202.7 billion in 2022.

· The highest economic profit ever made by a technology company is Apple’s $92.8 billion.

There’s also a fact based not on math, but on real-world experience: When the numbers get really big, it becomes difficult and eventually impossible to increase them by large percentages every year.

This isn’t just theory. This type of EVA analysis has proven insightful, showing the huge difference between a company’s stock price and the operating performance required to achieve it.

A. Luck analysis I found this in 2023 Tesla’s The stock was priced at more than $210. It dropped to $138, but since the stock is highly volatile, we warned it could rise above $210, and it did (recently $247). Most Wall Street analysts expect it to decline further from its $414 peak.

Luck Released an EVA in 2021 analysis It shows that Amazon’s stock price is unreasonably high. Investors who bought at that price regretted it. As we write this, the stock is exactly where the analysis appeared more than three years ago ($186).

Just before the infamous AOL-Time Warner merger was announced in 2000, Luck He published an EVA analysis that showed (correctly) that AOL shares were incredibly overvalued. The stock was the currency with which AOL acquired Time Warner, followed by a article He concluded that the deal must have been doomed to failure – as it was.

There is no problem with Nvidia. He gives an amazing performance. But those who have recently purchased the stock are taking on a much greater risk than they anticipated. They’re betting that Nvidia will continue to deliver outstanding performance for 20 years. Theoretically possible. In reality, betting that Taylor Swift and Shohei Ohtani will perform at the top of their game for the next 20 years may offer better odds.

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