Narratives – not earnings – Drive PEs
It is a strategic error to focus too closely on the more predictable control of quarterly earnings results, while providing a stale narrative for where future earnings growth will come from. Earnings are just the denominator. Price is driven by investor expectations of future earnings and the opportunities being addressed on which they will depend. The differences between PEs of ~10, ~25, and >40 are usually the result of predictable earnings, plus predictable future opportunities, plus expected disruptions. It’s the difference between Daimler, Toyota, and Tesla. In electronics, between HP, Apple, and Zoom. In chips, it’s Western Digital, Infineon, and Nvidia.
Investor perceptions of these differences are incredibly fickle: Sunny one day and stormy the next. Invariably, it’s the ability of the CEO to convincingly express a powerful narrative. Jensen Huang exudes confidence about Nvidia’s reengineering the auto industry with AI. Lisa Su does the same about AMD’s ability to take on Intel. Reinhard Ploss makes you believe in the future of auto and power and Infineon’s role in transforming them. Western Digital? Well… they’re just a memory company with two divergent product lines that makes it hard for an investor to get its head around. At the end of the day, a high PE comes either from disastrously low earnings or a believable narrative about a brighter future.
