CBA vs NVIDIA: A tale of two giants

In recent years, CBA and NVIDIA have each been the single largest driver of returns for the S&P/ASX 200 and the S&P 500 Indexes, respectively, pushing both markets to fresh all-time highs. Pulling back the covers, these charts reveal a far more interesting story about what’s been driving those returns… and more importantly, the very different risks now embedded in both stocks.

Sometimes a picture really does tell a thousand words

The white line plots the share price return. The coloured bars show why the price moved. There are ultimately only two drivers of any share price - earnings and valuation. (Dividends obviously matter to total return as we highlighted previously, but here we are isolating the share-price component).

• The BLUE bars represent earnings growth.
• For the NVDIA chart at left, almost all of the share price growth the past three years can be attributed to extraordinary earnings growth. EPS has surged from $0.17 (year to Jan ’23) to $3.51 (last 12 months), roughly a 2,000% increase or 175% annualised.
• In contrast, CBA has delivered almost no earnings growth over the same period. The blue bars show only 5% earnings growth in total.
• The ORANGE bars represent valuation expansion.
• Valuation is simply the price the market is willing to pay for a dollar of earnings. There are a huge range of considerations that go into Valuation, but for the most part, this reflects a forward-looking assessment of earnings growth and/or business quality.
• For NVDIA, Valuation has actually compressed slightly.
• However for CBA, the valuation has ballooned and delivered almost all of the share price returns.

Pick your poison

The colours make the contrast simple and highlight the very different risks now embedded within these two securities. More importantly, we believe these risks are representative of broader concerns within their respective markets.

Our concern stems from the increasingly concentrated nature of return drivers across both the S&P500 and the ASX200. While US index returns have far outpaced Australian, for active managers the decision to underweight either the AI thematic or the Financials sector, has had meaningful implications for relative returns.

Allocating the next dollar of capital

Investors owning passive exposures to both Australian and US/Global shares the past three years have been handsomely rewarded. However, alongside this strong performance, very different risks have also been building.

Some investors may argue that the risks we have highlighted are not risks at all. The AI transition may indeed change our lives for the better and how we work, although we’d question how long high earnings growth is sustainable, and thus, what valuation multiple should be applied.

The valuation concern is perhaps more tangible, as we see no evidence of a revolutionary change in Australian banking that would justify higher multiples. Valuations do tend to mean revert over time as fundamentals weigh out, although getting the timing right is always the challenge.

Active management has mostly battled against the build-up of these risk concentrations in recent years, with relative performance suffering. However, we would argue that now is precisely the time when active management can add meaningful value. As Howard Marks says, “While we can’t know where we’re going, we ought to know where we are”.

Investors will draw their own conclusions about what risks are priced in today. In our view, the giant returns from these two giant stocks now embed equally giant risks.