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Peter Lynch coined the term 10-bagger. Being able to successfully get a 10x return on an investment will be in the spotlight. So what if we could go one step further and get a 100x return on investment?
Nvidia is one such 100-bagger stock. Over the past 11 years, it has risen more than 250 times.
(Note: D stands for dividends)
In the process,. O'Keefe Stevens Advisory is one of them. The company's founder, Peter O'Keefe, bought Nvidia from April 2013 at a purchase price (split adjusted price) with a market capitalization of $7.7 billion. Today, Nvidia's stock price has a market capitalization of $2.1 trillion. O'Keefe has made more than 150 times returns in these 11 years, making it the most successful investment in his more than 40-year investment career.
History is the best teacher. O'Keefe shares how he thinks about the company during his ownership of Nvidia, and it also gives us a glimpse of what he went through along the way.
But we can't look at success in the rearview mirror. Investors wouldn't have recognized 11 years ago that AI would be where it is now, and that Nvidia would play a key role in it. Investors are starting to position Nvidia as just a GPU provider that enhances the performance of computer games. After that, Nvidia continued to expand its market and build and expand its own moats in the process of development, driven by waves of waves such as bitcoin mining, home office under the influence of the epidemic, and artificial intelligence applications. The stock price has also risen all the way through the ups and downs.
What is commendable is that for O'Keefe, the positioning and perception of the company will continue to evolve in the process of ownership, and he will continue to reposition the company from it, helping him gradually realize the value of the company.
It is this process of continuous learning and self-correction that allows O'Keefe to continue to hold this great company without fear of short-term twists and turns, bringing hundreds of times the return.
Here's how O'Keefe invested in Nvidia.
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O'Keefe's initial investment in Nvidia was in April 2013. NVIDIA is a leading developer of 3D graphics and multimedia processing technologies used in personal computers. As a result, O'Keefe was able to purchase its common stock at a low price.
The company wasn't dug by O'Keefe himself, but was inspired by legendary investor Mattie Whitman of the Third Avenue Value Fund to research and buy at $3.1 (split adjusted price).
At that time, Nvidia was positioned as a financially sound company with a dominant market share in the eyes of O'Keefe, and here are some facts:
1. Nvidia invented the graphics processing unit (GPU) and dominated the GPU market, and its share is still expanding.
2. Financially sound, with only $19 million in debt and $3.7 billion in cash.
3. The company's after-tax profit increased from $85.6 million in 2003 to $562.5 million in 2012.
4. The company began to pay cash dividends in the fourth quarter of 2012.
5. The company invests 25% of its revenue in R&D, and most of its 7,100 employees are engaged in R&D.
6. The Company is in the process of repurchasing its common stock.
7. The company's P/E ratio was 14 times at that time.
By all accounts, many of the metrics that Nvidia valued at the time didn't look expensive. For the next two years, Nvidia was O'Keefe's favorite investment target. A lot of things are changing. For example, gross profit margin has risen from 34% to 52% over the past four years. The company's business is getting better, but it's not obvious.
Moreover, the company does not have super-fast growth and does not have a high return on capital. Judging by the financial data at the time, this was not an obvious super performing stock. O'Keefe's investment logic at the time was based more on the growing importance of GPUs in video games and mobile phones, as well as Nvidia's dominance in the market.
Change + add position
In May 2015, Nvidia's annual report not only discussed its computer game chips, but also discussed other areas. Included in the report are:
1. "The computer game industry, valued at $100 billion, is the world's largest entertainment industry, surpassing Hollywood and professional sports. And it's still growing."
2. "We launched ™ NVIDIA DRIVE ®, the world's most advanced in-vehicle computer that will enable cars to increasingly perceive the world around them and will pave the way for self-driving cars.
Moreover. Deep learning is ignited by three trends:
- the deluge of data brought about by network service companies;
- the latest algorithmic breakthroughs created by some of the brightest minds in computer science;
- and the ability to compute massive amounts of data using GPUs.
GPU-powered machines are used to provide a variety of applications that make interacting with computers magical. Users can ask questions to their phones and get an immediate voice response. Speech recognition is just one of the applications. Image recognition is another application. And these are just the tip of the iceberg.
O'Keefe had a discussion with the team. So, they continued to buy more shares at about $5 per share (the split price), which is 60% higher than the original purchase price.
In addition, O'Keefe began listening to Nvidia's quarterly investor conference calls with management to better understand the company's business. Each quarter is a learning experience in improving your finances and launching new products.
An important turning point
An important turning point for O'Keefe was the May 12, 2016 conference call. Nvidia reports strong financial results for the first quarter, with highlights including:
1. Revenue of $1.3 billion, up 13% year-over-year – growth across all platforms
2. GAAP earnings per share were $0.33, up 38% from the year-ago quarter. Non-GaaP EPS was $0.46, up 39% year-over-year.
3.
CEO Jensen Huang said in a press release
"Our new PascalGPU architecture will give a huge boost to deep learning, gaming, and VR (virtual reality). We are excited to bring a new round of innovation to the markets we serve." Pascal processors are in full production and will be available later this month. "
This means: A few weeks later, O'Keefe held a meeting in New York, and Nvidia's common stock had risen sharply to about $48 in the days leading up to the meeting. O'Keefe said, "I think this could be a $300 stock!" when communicating with long-time customer Jerry, and customers have been joking about this phrase for the past 8 years, because it turned out to be the most frivolous sentence in a decade. Nvidia's closing price last week was $1,830 on a split-adjusted basis.
Because Nvidia shares had appreciated more than 15 times the original purchase price, O'Keefe sold some of his shares on Oct. 5, 2017, for about $180 per share to reduce his position because it had become an overinvestment.
Inevitable fluctuations
A year later, in October 2018, the price of Nvidia stock had exceeded $290 per share. Just a month later, Nvidia announced that it would be due to. Cryptocurrency miners who use GPUs sell their chips on eBay and other websites. By Christmas Eve, in just 2 months, the price per share was trading below $130. For O'Keefe, this event became a good opportunity to open a position. From this low, Nvidia's stock price has risen nearly 10 times in the next three years.
On March 11, 2019, Nvidia announced the acquisition of Mellanox. O'Keefe and his family attended NVIDIA's annual GPU conference in San Jose, California, March 17-21, 19, to get a firsthand look at many of Nvidia's technologies, including self-driving car demonstrations. An interesting fact learned during a conversation with a venture capitalist who said: "As far as he knows, none of the AI startups use any chips other than Nvidia's GPU chips".
By mid-2019, Nvidia's stock price began to rebound from cryptocurrency inventory issues. In Nvidia's annual report, released in early 2020, Huang said, "NVIDIA is focused on accelerating computing and solving important challenges that ordinary computers can't. We innovate at the intersection of computer graphics, high-performance computing, and artificial intelligence, and at our core we are a real-time simulation company – simulating the world, physics, and intelligence."
In 2020, when the pandemic began, Nvidia's stock price fell from $235.32 at the end of 2019 to $180, and then rose to $525.84 at the end of 2020 amid a flood of investment in technology companies spurred by flooding and working from home.
Nvidia's strong financial position and common stock performance continued into 2021, and the company also underwent a 1-for-4 stock split on July 21, 2021. During 2021, the split company's share price rose from $131.46 to $295.86. This year, it has risen by more than 160%.
By the end of 2021, the investment market began to become more and more obsessed with Nvidia, and the stock price officially became O'Keefe's first stock 100 baggers on November 9, 2021. Entering this uncharted territory also led O'Keefe to buy and read Christopher Meyer's book, How to Find Stocks with 100x Returns, to study this phenomenon.
The pace of 100 baggers is not going to be smooth sailing. Heading into 2022, the shadow of the Fed's interest rate hikes is gradually emerging, and financial markets are beginning to decline, with major technology stocks being hit particularly hard. Nvidia is no exception. By October 13, 2022, Nvidia fell to a trough of $108.13, a drop of 67% in less than a year.
Of course, O'Keefe also lost the legend of 100 baggers at this time. O'Keefe wrote a joke:
In the midst of such wild volatility, O'Keefe still holds on to Nvidia. Not only is it good financial performance, but NVIDIA is constantly expanding the range of its GPUs in applications (the addressable market is rapidly expanding) and fulfilling its previous development commitments.
Of course, the Nvidia myth is far from over. On November 30, 2022, the latest version of ChatGPT was released, and it immediately pushed the enthusiasm for artificial intelligence to a whole new level.
The stock starts doubling, doubling, doubling again, ...... This is another important point about 100 baggers: the real big gains are to come.
Microsoft, Google, Apple, and Amazon have all gone down generative AI. And what these companies are indispensable for is NVIDIA's artificial intelligence chips. In the first quarter of 2023 financial reports, many companies such as Microsoft, Tesla, and Google mentioned that Nvidia chips are the foundation of the AI revolution.
This propelled Nvidia to become the seventh U.S. company with a market capitalization of more than $1 trillion in June 2023.
The enthusiasm of the people is getting stronger and stronger. According to Barron's, 86% of Nvidia analysts recommend buying the stock, 12% recommending holding it, and no one recommending selling. Without a doubt, Nvidia is one of the best companies in the world and arguably has the best technology. In addition, it is the semiconductor manufacturer most likely to benefit from AI.
Whereas.
O'Keefe borrowed an analysis from Oaktree Capital's Howard Marks to discuss investor extremities in a May 2005 memo:
Investors tend to (a) ignore the lessons of past cycles, (b) be fooled by new developments, and (c) pile up on risky investments guided by clichés such as "this time is different", "high risk means high return", or "if it doesn't work out, I'll quit". Investors have made many of these logical mistakes in past market cycles, such as the real estate market at the time of writing this memorandum in 2005.
and Max's comments in his latest July 2023 memo on high-price-to-earnings stocks
History has shown that no matter how good a company is, as long as the price-to-earnings ratio is more than 50 to 60 times, the buyer should be careful. Proponents of high valuations point to fantastic growth and promising prospects for these stocks.
O'Keefe believes that the excitement brought about by the AI revolution is staggering, and there is no doubt that NVIDIA is leading the way. But this does not automatically translate into an increase in shareholder value. Despite all the confidence in the future, now is not the time to throw away the lessons of the past. This is especially true when it comes to valuing the price of a business. We've been talking about artificial intelligence for years, not what ChatGPT ignited for us.
O'Keefe borrows two opening lines from Charles Dickens' classic A Tale of Two Cities. ""。
Here's how he really feels about Nvidia: "While Nvidia has achieved excellent growth in terms of revenue and profits, I no longer think Nvidia's valuation is reasonable. “
So, after earning a 150-fold return from his initial investment in Nvidia, O'Keefe reduced his holdings in Nvidia and reinvested the proceeds in other investment opportunities.
。 O'Keefe didn't have All In Nvidia and also reduced its holdings twice during Nvidia's rally. In particular, the reduction of positions in 2023 made O'Keefe miss out on gains in the process of Nvidia doubling again less than a year later.
However, O'Keefe did not show the idea of regret.
- First, O'Keefe still has a large position in Nvidia, accounting for 21% of its total holdings.
- Second, O'Keefe delevered its position and invested it in other growth tech companies, such as Qualcomm.
- Last but not least, O'Keefe's operations are in line with his own investment approach, and he doesn't seek to make all the money he can make. To borrow a famous phrase from the investment world, it is:
Some other takeaways
In the process of investing in Nvidia's hundredfold returns, O'Keefe has some very interesting conclusions: looking back, how easy it is for investors to get lost in the funny details.
- The negatives he mentioned in his first memo included a 170 basis point increase in operating expenses due to higher R&D expenses;
- Each review of a single quarter's data, except for a few key nodes, is insignificant;
- hesitation to expect more or less earnings;
- chatter about how good or bad stocks have been doing well and badly in recent times;
- Macro discussion of the economy......
When you take a step back, all of this looks pointless over time. In front of the company with a hundredfold return, it has its own distinctive characteristics. These little quarterly updates don't matter at all.
Every business has a few key things to know. It can be called the essence of the enterprise, the beating heart, and the core engine...... Being able to identify these key factors and focus on them is the key to success.
Stop emphasizing individual quarters, recent stock performance, earnings forecasts, macro forecasts, etc. Think like a private owner of a business as much as possible. Think of your stock holdings as if you were real estate; it's something you intend to hold for the long term.
Finally, the "secret" to achieving long-term alpha lies in concentrating investments and allowing portfolios to become "unbalanced" over time. The winners of the market will bring a lot of gains, but you have to let them play to their heart's content. You can't do that if you keep lowering your investments.
summary
Everyone loves the myth of victory and wants to be one of the myths of "100 baggers". But, I think, the wonderful thing about this story is that O'Keefe's success is real.
- This is not an investment that can be recognized from the beginning and that NVIDIA has achieved a hundredfold return;
- Now the huge development prospect is the process of continuous development, adjustment and gradual realization of the enterprise itself for a long time;
- Investors are able to learn and re-perceive the value of the company in the process;
- And, I can persevere in the process of profit and twists and turns
Finally, since this is a story about a hundredfold return on investment, let's conclude with the core idea of Meyer's book: How to Find a Stock with a 100x Return. The most important principle of looking for baggers is to look for a company with consistently high ROI. He summed up the necessary rules for finding a hundredfold return:
1: You have to use limited time and limited resources to find 100 baggers, and don't waste limited energy on stocks that may generate a 30% increase.
2: Growth, growth, higher growth. 100 baggers represent 21 consecutive years of 25% annualized growth.
3: Preference for low valuation multiples must be weighed between price and other factors.
4: A moat is a necessity. Baggers require a high rate of return on capital over the long term. A strong moat is a barrier for companies to obtain high yields.
5: Don't invest in super-cap companies. Start with an acorn and you'll harvest an oak tree, and start with an oak tree and you won't get the same amazing growth. While not a requirement, searching for hundred-baggers in small companies is more likely than in large companies.
6: Preference for founders to run the business. The most successful companies in the last 50 years have had a visionary, resilient, and capable owner behind them: Steve Jobs, Jeff Bezos, Elon Musk, Warren Buffett, all that. Outstanding owner-operators help investors to strengthen their convictions. Knowing that a talented owner-operator owns a large stake and also controls the company makes it easier for investors to hold firm in the event of a troubled company.
7: Great investments take time. Even the fastest 100 baggers take 5 years, and more commonly 20-25 years. Investors need the patient nature of customer service, and not the strong urge to "take action" and "do something" vertically.
8: You need good information filters. Overly price-focused behavior and overly nervous mindset are meaningless, and the urge to trade will most likely lead to wrong results. Don't waste too much energy speculating about the future direction of the stock market. All you need to do is keep looking for good ideas.
9: Good luck is essential.
10: Be a person who is not willing to sell. If you want to look for 100 baggers, then you have to learn to stay focused and stick to it.
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