But the analogy with the entertainment industry breaks down in terms of what fans pay. Swift and Ohtani acolytes buy expensive tickets for a few hours of exhilarating fun, while investors in Nvidia want their money back and then some. A close look at the data suggests that long-term investors who buy stocks at recent prices are unlikely to get the returns they expect.

The analysis is based on economic profit, also called economic value added (EVA), a fundamental measure that avoids distortions in the accounting that public companies must use. It focuses on capital, how much it costs and how well a company uses its capital to generate profits. Research has found that this method of analysis is more predictive than looking at earnings per share.

An economic benefit analysis prepared in Fortune‘Request for Institutional Shareholder Services’ ISS EVA shows that Nvidia is the superstar it appears to be. You don’t have to be a financial expert to understand these numbers: Nvidia’s return on equity over the last four quarters is 140%, while its cost of capital is 9.3%. “Amazing,” says Bennett Stewart, one of the pioneers of economic benefit analysis. “It’s hard to imagine how they could get a much higher return on capital than that.”

This is how Nvidia makes amazing money. ISS calculates EVA data for 21,000 publicly traded companies worldwide and reports that Nvidia is among the 100^th profitability percentile. That doesn’t mean Nvidia is in the top percentile (which would be the 99th^th percentile). It means that Nvidia is above each of those other 21,000 companies, or possibly has ties to some of them.

But those notable numbers reflect the past, and stock prices are based on the future. Hence the critical question for investors: What are the chances that Nvidia will perform well enough in the coming years to justify the stock price, recently around $136? EVA can help answer that question.

We asked ISS EVA to estimate how fast Nvidia would have to grow its financial profits annually over the next 20 years to justify its recent stock price. The answer: 21.4%. Nvidia must increase its economic profit by 21.4% each year for 20 years. If you can’t do that, your recent stock price is too high.

So can you do that? No one knows for sure, but here are some numbers for context.

· Nvidia’s economic profit during the last four quarters was $46.2 billion. Its economic benefit should have increased to $2.2 trillion over the 20 years.^th year alone to justify its recent share price.

· The highest financial profit ever made by a company in 12 months is $202.7 billion, achieved by Saudi Arabian Oil Co. in 2022.

· The largest financial profit ever obtained by a technology company is Apple’s $92.8 billion.

And then there is a fact based not on mathematics but on real-world experience: when the numbers get really big, increasing them by large percentages each year becomes difficult and eventually impossible.

This is not just theory. EVA analyzes of this type, which show a huge gap between a company’s share price and the operating performance needed to achieve it, have proven to be prescient.

TO Fortune analysis In 2023 he discovered that tesla The shares were overvalued at $210. It fell to $138, although because the stock is very volatile, we warned that it could jump above $210, which it has (recently $247). Most Wall Street analysts expect it to decline, falling further from its high of $414.

Fortune In 2021 it published an EVA analysis of Amazon’s share price showing that it was unreasonably high. Investors who bought at that price have regretted it. As we write this, the stock is exactly where it was ($186) when the analysis appeared more than three years ago.

Just before the infamous merger between AOL and Time Warner was announced in 2000, Fortune published an EVA analysis that showed (correctly) that AOL stock was incredibly overvalued. Stock was the currency with which AOL bought Time Warner, and a subsequent article concluded that the agreement had to be doomed to failure, as it turned out to be.

Nvidia has no problem. It’s working spectacularly. But recent stock buyers are taking on a lot more risk than they realize. They are betting that Nvidia will continue to perform spectacularly for 20 years. In theory, it is possible. In reality, betting on Taylor Swift and Shohei Ohtani to perform at the top of their game for the next 20 years might offer better odds.

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