A look at Nvidia's earnings; A reminder on how to handle a 'high-class problem' with Nvidia's stock; A tailwind for Berkshire Hathaway's GEICO subsidiary

1) As you would expect, everyone had their eyes on Nvidia (NVDA) after yesterday...

And once again, the chipmaker reported another stunning quarter after the market close.

Revenue soared 12% from the previous quarter and 78% year over year, while adjusted earnings per share jumped 10% and 71%, respectively. The company also gave strong guidance for the first quarter, with revenue expected to grow 9% sequentially and 65% year over year. All of these numbers were above analysts' expectations.

Here's a Wall Street Journal article with more details about the earnings report: Nvidia's Bumper Sales Show AI Bonanza's Strength. Excerpt:

Nvidia reported sharply rising sales and profit in its latest quarter that showed spending on its chips continues to soar despite jitters about the outlook for the AI boom.

Nvidia brought in $11 billion of revenue from its new Blackwell AI chips, the company said in its earnings report Wednesday, making good on a prediction last year that sales would be strong. The new chips made up nearly a third of the revenue in Nvidia's data-center division for the quarter.

And as the article continues:

Underpinning the buying surge, Chief Executive Jensen Huang cited a shift in AI toward "reasoning" models that require more computing power as they use their digital brains to think through their answers. DeepSeek, the Chinese AI developer that spooked Nvidia investors recently with a reasoning model that used fewer of the company's chips, had "ignited global enthusiasm," Huang said in a call with analysts.

Huang called DeepSeek "an excellent innovation," adding that nearly every AI developer was using it or techniques inspired by it. Reasoning models required a hundred times more computing resources, he said, and future ones were destined to need even more.

By any measure, these are extraordinary numbers.

Just look at the company's performance over the past four years – here's quarterly revenue and net income:

I'm not sure any company in history, from such a large base ($6 billion in revenue and $1.4 billion in profit in the last quarter of 2022) has grown so much in two years.

So why is the stock down today?

In a word: valuation.

Analysts expect Nvidia to generate $129 billion of revenue and earn $2.95 per share this year (ending January 2026). So as of yesterday's close, with a roughly $3.2 trillion market cap, the stock is trading at about 25 times revenue and about 44 times earnings.

Those are nosebleed valuations, especially when the year-over-year comparisons are going to keep getting more difficult going forward after such explosive growth.

I've said many times previously that Nvidia is a great company – and it may do very well going forward. But, to repeat what I wrote last August, this is the kind of stock I like to pound the table on when it's down at least 50% (if not 75%).

If you think that can't happen, take a look at the five-year performance chart of Meta Platforms (META) and Netflix (NFLX) below. As you can see, both stocks dropped more than 75% from late 2021 to late 2022 – giving investors extraordinary buying opportunities (I was pounding the table on both of them):

2) But the fact that I wouldn't buy Nvidia today doesn't mean I would sell it...

As I wrote in yesterday's e-mail:

As I've written countless times, the key to long-term investment success is being clever or lucky enough to have a couple of big winners in a portfolio of 10 to 20 stocks – generally market leaders riding big waves – and then holding them for years (or even decades).

Think Costco Wholesale (COST) with warehouse clubs, Netflix (NFLX) with streaming videos, Meta Platforms (META) with social media, Visa (V) with credit cards, Apple (AAPL) with smartphones, Walmart (WMT) with supercenters, Nvidia (NVDA) with AI, or McDonald's (MCD) with fast food.

So if I owned Nvidia, I would hang on... I dedicated an entire e-mail to explain my somewhat counterintuitive thinking on September 5. It comes down to this key question I mentioned:

What should you do if you own the stock of a great company, it's firing on all cylinders, and the stock has skyrocketed?

Keep in mind that this is a "high-class problem" – it's one that all investors hope to have often!

On the one hand, I referred to what I said back on June 11:

... the key to long-term investment success isn't just being smart – and lucky – enough to own a few huge winners. You must let your winners run.

Looking at the math behind long-term investment success, take any portfolio of 20 stocks or more, and you'll see that it isn't usually driven by a high batting average (e.g., 80% of the stocks go up), but a high slugging percentage (a few huge winners) instead.

But of course, this math doesn't work if you sell those winners – that cuts off the long right tail of the distribution.

On the other hand, as I continued in that September e-mail:

But what if such a stock becomes such an outsized portion of your portfolio that you're losing sleep at night?

An easy answer is to trim it – but not too much.

3) In Tuesday's e-mail, I shared highlights from Warren Buffett's annual letter to Berkshire Hathaway (BRK-B) shareholders – in which he gave a big shoutout to Todd Combs...

Combs has overseen an explosion in earnings – which have gone from negative $1.9 billion in 2022 to $3.6 billion in 2023 to $7.8 billion last year – for auto insurer GEICO, a major subsidiary of Berkshire. As Buffett wrote:

Our insurance business also delivered a major increase in earnings, led by the performance of GEICO. In five years, Todd Combs has reshaped GEICO in a major way, increasing efficiency and bringing underwriting practices up to date. GEICO was a long-held gem that needed major repolishing, and Todd has worked tirelessly in getting the job done. Though not yet complete, the 2024 improvement was spectacular.

I have no doubt that Combs has done a great job, and that GEICO really is performing much better.

But I would be very curious to know how much of the improvement is due to the fact that, according to Creative Planning's Charlie Bilello, in his recent Week in Charts blog post, "auto insurance rates in the US have increased by 55% over the past 3 years. That's the biggest 3-year spike since 1975-78." Here's the chart Bilello shared regarding this:

To some extent, what we're seeing is the inverse of Buffett famous maxim: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

I think there's a broader investing lesson here: while there are many exceptions to this rule, in most cases I'd much rather be right about the industry and competitive dynamics than the management team...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.