Nvidia's mind-boggling, blowout earnings; Why you need to let your winners run; Nebraska just sued TikTok
1) Nvidia's (NVDA) first quarter was nothing short of mind-boggling.
I'm not aware of any company in history that has grown revenue in one year by nearly $20 billion from a figure less than $10 billion.
But that's what the innovative chipmaker just did... and it's unprecedented.
After the close yesterday, Nvidia reported blowout first-quarter earnings and announced a 10-for-1 stock split.
Revenue soared 262% year over year from $7.2 billion to $26.0 billion, and adjusted earnings per share rocketed up 461% year over year.
The full release is here, and below are two articles in today's Wall Street Journal with more about the earnings report:
Not surprisingly, the stock rose as much as 10% earlier this morning – to an all-time high. Today's move makes the company worth nearly $2.6 trillion (it was "only" worth $1 trillion as recently as last October).
The stock is up a staggering 1,513% since I pounded the table on it on February 5, 2020, back at my former firm Empire Financial Research.
Even going into yesterday's earnings report, Nvidia was already the second-best performing stock in the S&P 500 Index over the past five years and the best performer over the past 10, 15, and 20 years.
Take a look at this table from Charlie Bilello's latest Week in Charts post from earlier this week with the breakdown:
2) So... what are my thoughts on the stock today?
With a price-to-sales (P/S) multiple of about 39 times, it's certainly priced for perfection...
For some perspective, even going into the earnings report, the stock was already trading at the highest P/S multiple in the S&P 500 this year by far – take a look at this table (again, courtesy of Bilello's latest Week in Charts):
And as this article from today's WSJ notes, Nvidia's competitors and customers are scrambling to catch up: Nvidia's Business Is Booming. Here's What Could Slow It Down. Excerpt:
A big question for investors is whether Nvidia can keep up the momentum or if the market will drop off amid a confluence of market and competitive challenges.
Nvidia's chip-making competitors are increasing their game, releasing their own AI chips that they have claimed are better, at least at some AI computing tasks. They are also aiming to displace Nvidia's dominance in software used to access its GPUs, responding to demand from customers who want alternatives. Nvidia's market share in AI chips is estimated at above 80%.
That said, I don't see anything derailing the artificial intelligence ("AI") boom or Nvidia's dominant position anytime soon.
So, while the old-school value investor in me prevents me from recommending buying a new position here, I have a different answer if you're lucky enough to own the stock...
My advice remains the same as what I wrote on February 23, after the company's fourth-quarter earnings report:
So what should you do if you own this monster stock?
Mostly let it run. Throughout my career, I've had a few of these "10-baggers in just a few years" – like Apple (AAPL) and Amazon (AMZN) at the turn of the century and Netflix (NFLX) in October 2012. And in every case, I sold too much, too soon.
I've said it many times: 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.
As I also said in my February 23 e-mail:
There are a handful of reasons why the S&P 500 Index beats nearly all active managers over time – but the single biggest is that it never sells its winners.
After Nvidia, Apple, Amazon, Netflix, Microsoft (MSFT), etc. doubled, it didn't sell.
And it didn't sell after these stocks went up 10 TIMES.
Nor 20 times, nor 50 times, nor even 100 times!
Index funds – with their passive approach to investing – let their winners run. As I continued:
If you look at the math behind long-term investment success, take any portfolio of 20 stocks or more, and you'll find that it's not generally driven by a high batting average (e.g., 80% of the stocks go up), but rather a high slugging percentage (a few huge winners).
But this math, of course, doesn't work if you sell those winners – thereby cutting off the long right tail of the distribution.
And as I said, getting back to Nvidia (but the same applies for other monster positions like it):
As an investor, you could maybe sell 10% if it has become such an oversized position that it's disrupting your sleep at night. And maybe put in stop losses to protect half of your gains – for example, sell 10% if the stock drops 10%, another 10% if it falls another 10%, etc.
There's no "right" answer here – this is more art than science.
But don't make the mistake of taking all your gains just because a stock doubles. Like I said... You have to let your winners run.
3) This post on X by CNBC's Carl Quintanilla shows that income growth in China has slowed significantly in the past decade under President Xi Jinping:
This slowdown isn't surprising given how much larger its economy is.
The key for China going forward is to pivot from low-cost manufacturing to higher-end, higher-wage manufacturing and services.
The obvious ways to do that are: a) to liberalize to unleash creativity... and b) to integrate as much as possible with the Western world.
Instead, Xi is doing the opposite, which doesn't bode well for China's future...
4) Following up on an item in yesterday's e-mail...
I discussed the issue of rising anxiety and depression across the globe – especially among young people – and the role I believe social media is playing in it.
And when it comes to social media, TikTok is the most dangerous.
Its algorithms are extremely addictive. This results in users – especially young ones – spending far more time on TikTok than other platforms, as this study of 4- to 18-year-olds shows. Take a look at this chart:
TikTok also likely manipulates its content to appease the Chinese government. As I wrote on January 4:
A new study strongly indicates that TikTok suppresses posts that might offend the Chinese government (pro-Ukraine, the Uyghurs, Taiwan, the South China Sea, Tibet, Tiananmen Square, Hong Kong, etc.): TikTok's content on some political subjects aligns with the Chinese government, study says.
And this article in the WSJ details a new development on this front: Nebraska Sues TikTok for Allegedly Harming Minors. Excerpt:
Nebraska sued TikTok on Wednesday, alleging the platform was designed to be addictive and is harmful to children.
The Nebraska Attorney General's Office said TikTok designed its algorithm to feed users, many of them children, a stream of videos aimed at holding their attention. The algorithm cultivates compulsive behavior "like a sophisticated gambling machine," Nebraska said in its complaint filed in state court. It alleged deceptive trade practices.
The platform's addictive nature, the complaint said, has contributed to an increase in mental-health problems in Nebraska children, including depression, anxiety and eating disorders.
"For TikTok and companies like them, they make lots of money on being able to attract what they call their 'golden audience' – young people under the age of 17 – and get them addicted on their platform," said Nebraska Attorney General Mike Hilgers at a news conference Wednesday.
I'll repeat what I said yesterday:
In-person interactions are the key to building social skills and friendships that are the root of human happiness.
The problem is that social media is increasingly replacing face-to-face relationships, so parents need to monitor and minimize their children's use of social media – and an assist from the government could help.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.