Friends,
We're going to show you the revenue growth of two companies over the past decade. But we're not going to tell you which companies we're talking about...yet.
While both are well-known names, they've had very different paths over the past 10 years.
- The BLUE company has seen revenue go up roughly 4,700% -- or about 45% per year. That's among the best for large cap stocks in the world.
- The ORANGE company's revenue has gone up 139% during the same time -- or a modest 8.5% annually.
Here's the question: which company do you think is more highly valued, based on P/E ratio?
The shocking answer: the orange one.
That's right, as of this writing, NVIDIA (the blue line) trades for 51 times trailing earnings, while Costco (the orange one) trades for 54 times the same metric.
How could this possibly be?
Look, we won't argue that Costco is cheap. Far from it. But we also think there are two crucial parts of Costco's business that is often under-appreciated by investors: the durability of the moat, and the consistency of the business.
Think about this from a real-world perspective:
- Costco makes the lion's share of its profits from membership fees.
- It would be impossible for a competitor to disrupt Costco over night -- we'd see it coming from a mile away.
- Revenue growth has never -- not once -- gone negative over the past decade.
And while this isn't a knock on everything NVIDIA has accomplished, we need to remember:
- NVIDIA currently has 70% gross profit margins; it clearly has the best technology for AI...for now.
- The biggest companies in the world are working day and night to create a cheaper alternative to NVIDIA's technology. While disruption is uncertain, it's definitely more likely in tech than in Costco's consumer staples business.
- On two different occassions, NVIDIA's revenue growth has flatlined or gone negative over the past decade.
Let's be clear: we're not playing favorites. Both of these companies deserve consideration for a well-balanced portfolio.
The takeaway is this: tech innovation is sexy -- it changes the world. But reliability is just as highly valued by investors, even if it doesn't get all the headlines.
A healthy dose of both will likely set you up for long-term success -- which is the only kind that really matters.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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P.S. - Read any good content about how A.I. can help with stock investing? We'd love to feature it! Just reply with the source link and your name.
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