The 17 Year Round Trip

A cautionary tale AI investors should consider today.

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Jason’s Random Words

I continue to be entranced by the Nvidia story. It's been remarkable not just how much the stock has gone up, but how much bigger its business has grown in just a few short years. From The second quarter of 2020 through Q2 of 2022, its revenue increased 129%. That's up more than double in three years. Remarkable for a company that earns its money almost entirely from physical products. 

Well, over the past year, Nvidia had its "hold my beer" moment. Sales has more than tripled in the past year, from about ~$25 billion to $80 billion over the past four quarters. And it's turned almost half of that revenue into free cash flow, growing that metric 671% in the past year. 

It's just amazing how excessively profitable this business has become. 

Will it last? I don't know. There's clearly a case for this business to get a lot larger in the next year, decade, essentially any period of time you care to measure. It's light years ahead of its nearest competitor, and the hyperscalers and big tech software companies clearly expect artificial intelligence is going to generate a lot of business for them based on how much money they are spending on Nvidia GPUs, new data centers, and to programmers to develop tools they can sell. 

We don't know whether those efforts will fully realize the vision of bullish analysts, but the case is real, and the potential is legitimate. 

But back in 1999, so was the case that Microsoft would keep growing and becoming more profitable on this whole "World Wide Web" thing. And indeed, it did grow and become more profitable. From the December 1999 stock peak, Microsoft would grow sales 324%, double free cash flow, and increase net income 143% over the next 17 years. 

It would also take that entire 17 year period for Microsoft's stock price to recover and set a new all-time high. On average, the stock was 45% lower than the 1999 high for the next 17 years. 

Just think about that for a minute. A company more than doubles its profits, pumps out gobs of free cash flow ever high year after year, yet takes the better part of two decades to just get back to breakeven for its stock price. Adding insult to injury, the S&P 500 gained 115% over that period. So Microsoft investors missed an easy double that the laziest of index investors enjoyed. 

I'm sure those of you who've been around for a while want to point out that Microsoft stock was "crazy expensive" back then. And that's true. It traded for about 80 times trailing earnings at the end of 1999. A little more expensive than the 70-something trailing earnings Nvidia shares trade for today. 

Don't get me wrong; I'm not trying to scare anyone who owns Nvidia out of holding their shares. The stock makes up more than 3% of my portfolio, and I don't have plans to sell. I'm just making the case that when high expectations (and valuations) collide with a combination of subpar returns, the losses can be bigger than you expect, and take longer to recover than you think. 

What can we do about it? As a starting point, innoculate yourself with knowledge of what you own, what it competes with, what you could get wrong, and what the implications of being wrong could be. You're not going to get it perfect (selling half my Nvidia over a year ago is a great example, as is owning no less than three companies that filed for bankruptcy) but that shouldn't be the goal. 

Getting it right enough, often enough, is a more manageable North Star. Better yet, applying Charlie Munger's inversion principle, one might say, getting it wrong less often is what we should aim to do. 

What does that mean for you and Nvidia or other high-flying stocks? I don't know. But you can figure it out. I believe in you. I made a video on our YouTube Channel talking about the Microsoft 17-year round trip for its stock. You can watch it here



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