Nvidia has emerged as a standout in the stock market, drawing comparisons to high-profile figures such as Taylor Swift and Shohei Ohtani. Known for its remarkable performance and appeal, Nvidia has managed to create a market capitalization of $2.5 trillion in a span of just ten months, with its stock being heavily traded by enthusiastic investors. Within a year, the company has solidified its status as a star performer.
However, unlike fans investing in Swift and Ohtani for entertainment, stakeholders in Nvidia aim for profitable returns. A detailed analysis using economic profit, also known as economic value added (EVA), reveals challenges for long-term investors purchasing Nvidia stocks at current prices. This analysis focuses on the cost and use of capital to determine profitability and is considered more reliable than traditional measures like earnings per share.
Research conducted by Institutional Shareholder Services (ISS) at Fortune’s request confirmed Nvidia’s remarkable financial performance. Over the last four quarters, Nvidia achieved a return on capital of 140% against a capital cost of 9.3%, a performance described as “staggering” by Bennett Stewart, an economic profit analysis pioneer. This places Nvidia at the very top in profitability among 21,000 publicly traded companies worldwide.
Despite these impressive figures, they reflect past performance, while stock valuations are driven by future expectations. The key question for investors is whether Nvidia can sustain its performance to justify its stock price, which was around $136 at the time. ISS EVA calculated that Nvidia would need to increase its economic profit by 21.4% annually over the next 20 years to match this price.
To put this into perspective, Nvidia’s economic profit in the past year was $46.2 billion. A sustained growth rate would require this profit to reach $2.2 trillion in the 20th year alone to align with recent stock valuations. Historically, Saudi Arabian Oil Co. holds the record for the highest economic profit at $202.7 billion in a year, and Apple achieved the highest for a tech company at $92.8 billion.
Achieving substantial percentage increases in large figures is notably challenging, a reality supported by EVA analysis. For instance, a 2023 Fortune analysis predicted Tesla’s stock was overvalued at $210, and indeed it saw a reduction to $138, although it eventually rebounded to $247 amid volatility. Similarly, a 2021 analysis of Amazon indicated an excessively high stock price, which remains at the same level today as when the analysis was released.
Nvidia’s current performance remains exceptional, but new investors face significant risks in expecting sustained success over two decades. While theoretically possible, relying on Nvidia as a long-term investment may be riskier than hoping for similar performances from Swift and Ohtani over the same period.
Moreover, an upcoming Fortune Global Forum event on November 11 and 12 in New York City promises valuable insights with Fortune 500 CEOs and renowned speakers.
