This Stock "Has More Upside" Than Nvidia (Tom Lee's Top Pick)

Welcome back, everyone. Today on the Joseph Carlson show, NVIDIA reports earnings, the biggest company in the world is posting its earnings, and this gives us a little bit of a weather vane of how things are going to go for the next three months. So we'll be looking at the biggest things to look for going into these earnings, as well as follow-up questions from the earnings call. We'll be going over all of that. Now we also have a lot of other news to get into. For example, Tom Lee is now making the rounds online, talking about his new bull thesis for financials. That's right. He's very bullish on financials. In particular, companies like JPMorgan Chase. He believes that they have major upside. He believes that they deserve tech-like multiples. So we'll be looking at his arguments. Now we also have news that Google could lose a $26 billion deal. We'll be looking at more details of that. We have Cracker Barrel reversing their stance on their logo. And then the American Eagle marketing team is at it again. They pulled yet another stunt like they have before. We'll be looking at how brilliant this one is as well. So we have a ton to get to in this episode, and we start off today with the NVIDIA news. Now, before jumping in, just a quick mention. There's no sponsorships for this episode, and that's a deliberate choice. I have companies that want to sponsor this show all the time. And typically we decide not to because I've built my own product, which is Qualtrom.com. It's a stock analysis tool that I own 100% outright. It's not venture backed. There's no angel investors, VCs. There's no massive debt taken out to build it. It's been built up by investors, by this community from the ground up. Taking feedback from community members on every single aspect of it. So if you use Qualtrom, you'll notice that it seems tailor made for our style of investing. So if you want to try that out, it's part of the Patreon membership. It's $10 a month, cancel anytime. And most people that try it out love it. We've now surpassed well beyond 10,000 members. We're climbing up to 11,000. So try that out if you haven't. Now let's go ahead and jump into the news here. The big stock on deck to report earnings is NVIDIA. And this one is a little bit of a laggard. We've had basically most of the earnings season. We got a preview of what all the other big tech companies have reported. Amazon and Google and Microsoft and Meta and so on. So we do have a lot to inform us on what NVIDIA's report's likely to be. But there's still a few unknowns. Now, first of all, I just want to look at a couple of things before we get into what to expect going into this earnings report, NVIDIA is now the biggest company in the world. It's beat out Microsoft. If we look at Microsoft, we can take a look here at the market cap currently. Microsoft is 3.75 billion. So not bad. It's a relatively big company. But 3.75 billion is actually, it's quite a bit smaller than NVIDIA. NVIDIA is now at 4.44. So NVIDIA has sailed above Microsoft in size. Now, the reason I point that out is just to give some context of how big this company has become. NVIDIA is now a massive beast of a company. It's so big that the numbers in order to move this stock need to be substantial, and they're going to put up substantial numbers that will justify the valuation of the company. That's the crazy thing is this company's so big, yet its valuation is justified given the current metrics. When we look at the revenue growth, for example, this is on a trailing 12 month basis, look how much it's spiked over just the past two years. So the revenue was in 2022, about 30 billion. Now it's 150 billion on a trailing 12 month basis. If we look at this on a quarterly basis, so this is not trailing 12 months, we can take a look at the most recent quarter. Now, if we assume that they're going to make just this most recent quarter times four, that's the revenue run rate of the company, that's what? 100 and it's 44 times four. So 170, 180. So around $180 billion in revenue. And again, if we go back to the quarterly trailing 12 months, this is 148. Meaning that if we just take this last quarter, not the one that they're reporting today, but their quarter before that, we times it by four. We still have $30 billion to go for this company. They're still going to grow revenue meaningfully from this standpoint. So this isn't a company like Apple where growth has slown, where it's tough to get growth. It's not like Tesla where growth has slown and it's tough to get growth. Nvidia is still running full speed. Now, growth will decelerate a little bit because it's virtually impossible not to decelerate with how fast it's previously grown. But deceleration isn't the worst thing in the world. Growth is still incredibly fast for this company. So we can expect Nvidia's revenue to be like $180 billion over the next four quarters on a trailing 12 month basis, just based on their revenue run rate, even accounting for moderate deceleration. But that's not all. Nvidia is also really good at converting that growth in the profitability. When we look at the profitability, it shows a very similar arc. Nvidia, for example, just the past 10 years, it looks like this. In the trailing 12 months, it's $72 billion in free cash flow. That's as much as Google. But Google's not growing its free cash flow at the same rate. So right now it's doing the same amount of free cash flows at Google, but growing it five times as fast. That's really incredible. When we look at the stock based comp, Nvidia has very little, $5 billion. So that's less than Google. That's less than Meta. That's less than Salesforce. That's less than a lot of other companies proportionate to its free cash flow. The free cash flow per share has grown by 84% in the trailing one year. Now, you may point out that this is all history and we need to be forward looking as investors. And while that's true, there's nothing that better informs our future than history. And even so, if we look at the future, we see companies now, like Google, like Meta, like Amazon, that have already reported earnings and many of them are saying the same theme. For example, if we go to Google's earnings transcript, summarized by Qualtrum here, we have the financial outlook, performance outlook. And if we look at one section of it, it says legal, depreciation, marketing and headcount costs are set to rise, particularly as AI investments, infrastructure ramp. What is ramping? AI and infrastructure investments. If we go to the Google Cloud section, they repeat the same thing. Capacity growth is ongoing, but the environment remains tight. And CapEx is being increased to accommodate demand. CapEx can basically be substituted for spend on NVIDIA. So if we were to rephrase this sentence, it would say, and spend on NVIDIA is being increased to accommodate demand. That's another way that Google could have said it, because most of that CapEx spend, most of that infrastructure cost is going to NVIDIA. Basically, all of big tech either said that they're moderating or increasing their spend on CapEx. None of them said that we're lowering it. None of them said that we're cutting budget aggressively. We're going down in our CapEx spend. So at the very least, what we could expect from NVIDIA is a slight deceleration of revenue, but it's still going to continue growing as long as these big customers continue growing in their spend. Now, if we look specifically at this earnings report and what to expect, we can see the history of their earnings here. We see the chart over time. The blue is when they beat earnings expectations. The red is when they've come under earnings analyst expectations, and most of the time they beat. They've done it every single quarter except for two since 2020. When we look at the estimates, it's not only that NVIDIA beats, but they typically beat by a lot, especially since 2023. They're beating by 20, 30 percent. So these are massive beats quarter over quarter over quarter. And they've been on a roll. I have no reason to believe that they won't this quarter. I think they're going to have the same type of outcome. NVIDIA is going to come out with an amazing report. That's what's going to happen. NVIDIA is always dancing this fine line of doing business in China, having export controls. This is something that there's news changing all the time. Even without this, NVIDIA still grows. But with China added in, it's just another additional growth path. We're gonna be looking at an update of how smoothly they're able to scale their Blackwell production. That's gonna be a big part of this call. There's also the acceleration of inference and reasoning AI demand. So the demand typically started as training. Now it's moved to inference. And NVIDIA, of course, is capitalized on that market of inference. In terms of the stock trading, it's impossible to predict which direction it will go, which type of news headline investors will latch on to. There's many cases where NVIDIA posts earnings. The stock is relatively flat and then it grinds higher as a result later on. Now, moving on, we get to Tom Lee's opinion on NVIDIA's report, as well as what he believes is even a better trade than NVIDIA. We'll take a listen here. I mean, I know investors are really anxious and NVIDIA has not performed well the last few times it's reported. But the story arc there remains that that is one of the most important companies in the world, in the middle of the biggest structural change in the world economy. So I think NVIDIA still is a great story. It really wouldn't change our thesis if the stock reacted poorly. NVIDIA stock has had trouble right after earnings, but typically you give it a couple of weeks and the stock starts to trend back up with the fundamentals improving. Now, if we listen to what Tom Lee says here, he says that NVIDIA is an important trade, but not the best trade. I think there's a bigger upside in the owning financials right now because financials are benefiting from A.I. OK, so they're the second order beneficiaries. Plus, they're getting the green light to build on the blockchain, which could really make J.P. Morgan and Goldman's business models so much more profitable and change their multiples, expand them. So I think, yes, I'm still bullish on A.I., but I actually think the financials are really one of the legs that drive us the next 12 to 24 months. Now, I thought that was really interesting. J.P. Morgan is actually a company that I really like. It's my favorite bank in the world. I think it's the best bank in the world. And it's one that I've had in my portfolio. In fact, J.P. Morgan is a company that I owned around 2020, sometime around there, maybe a little bit earlier. It paid big dividends. It had a nice free cash flow yield and the stock went up a lot as it recovered. In fact, I made around $14,000 in gains on J.P. Morgan. I sold the stock and that was a mistake. I should have kept the stock. When Tom Lee mentioned J.P. Morgan, I took a look at the stock price. Year to date, it's up 25 percent. We zoom out to the past one year, it's up 35 percent. In the past five years, it's up 191 percent, not counting dividends, which J.P. Morgan pays hefty dividends. And the earnings growth and revenue have all been incredible. J.P. Morgan has benefited dramatically over this time period, not from just banking services, but also just credit card services. They have a huge dominant position in credit cards. J.P. Morgan is a big partner with Visa. They have all these different branded Visa cards like the Sapphire. They really capitalized on that market. They have wealth management for wealthy individuals. They have corporate investment services. They have so many different things that they do in the wealth management category. And that's also been a booming business over the past five years. But Tom Lee is saying even if you missed out on J.P. Morgan over the past five years, you can invest in it today and still outperform the market. The reason why is he's saying that it deserves tech like multiples. We look at J.P. Morgan right now and it doesn't have tech like multiples. It has bank like multiples. If the multiples go from a 15 P.E. to a 25, then that's massive gains just with multiple expansion. So I agree with Tom Lee's thesis on this. I don't know if J.P. Morgan will ever be treated quite as much as a tech company because I do think there's increased risk to lending money. But overall, I do think these companies deserve a bit higher of a multiple. Now, let's go to move on to some other news here. In this case, we have more Google talk. We've been going over this. Google is now a stock that's being watched every single day because, again, the case with the judge is imminent. We don't know the ruling, so we're just speculating on what's going to happen. Any day now, a federal judge is expected to issue a landmark ruling that could upend the most lucrative deals in Silicon Valley. Google's default search contracts at stake is more than 26 billion dollars a year or 20 billion, which 20 billion goes to Apple alone. That's nearly a quarter of Apple's operating income. So a lot of people are focused on Google with this deal. But if I was an Apple investor, I'd be very focused on Apple as well. They may lose 20 billion dollars of revenue from this. While Google risks losing some search traffic and predictability, analysts say Apple could take a bigger financial hit. So again, Apple's trading sky-high valuations like there's not a care in the world when they're likely going to take a bigger hit from this ruling that has to do with Google than Google. The impact will hinge on whether Apple's lineup of new deals and how broadly the ruling applies. Jeffrey's analyst says that the judge may block exclusive contracts, but still allow some payments, even so Apple's pre-tax profits could drop by as much as 7 percent. Some economists and Wall Street analysts believe that Google might come out ahead in the long run, freed from costly deals that no longer drive demand. I've been saying this for a while, that I think this judge is saying the right things and kind of doing the right things, but just five years too late. This whole case, the search deals, the exclusivity, even Google being a big, bad monopolist, all of that was true about five years ago. But now Google has serious competitors with AI search. The exclusive deals don't seem to matter as much. This entire case is just a little too late. Like many cases with the government, it's addressing a problem that's already been solved by capitalism. Having this outcome would be the best case for Google. The worst outcome would be having to sell Google Chrome. Now, moving on, it's not often that we have the Internet collectively win. But in the case of the new Cracker Barrel rebrand, the Internet did win. The company is reversing its decision to move to the new logo. So they're still going through with the rebrand and a refreshment of the restaurant, which I think is fine. That was never my criticism for this company. My criticism was only the new logo. And if you look at it, you can see the reason why. This is what they're moving from. And this is what they're moving to. Now, if you just opened up a new restaurant, I think this logo is OK. But it's still lifeless, soulless. The new Cracker Barrel logo looked more like a tech company than a sit down restaurant supposed to be reminiscent of old times, of a country store. It literally looks more like it could be like a new financial service company. Like you're going here to get a new checking account. If you look at the logo and the design, it does not remind you of a fun place to go eat. And now after widespread online backlash, they've decided to reverse the opinion. Now, shares of Cracker Barrel are now up 7% since the restaurant chain said it would scrap its new logo and return to the original one amid mounting criticism from social media users and even President Donald Trump. An interesting thing about this, in most cases, when you have something that a company does like this, scrapping a unique old historic logo, switching to a new one, there's usually a certain cohort of the Internet that's upset and there's a specific group that doesn't mind it. So like there's part of the Internet that doesn't like it, part of the Internet that does. But this case was unique. This case was so bad. The new logo was so bad that almost everyone on the Internet didn't like it. Republicans and Democrats almost never agree on anything. But the one thing they could agree on was that they hated this new logo. This is the most uniting thing to happen to the country in the past 10 years. So congratulations, Cracker Barrel. You tried to do a logo so bad you actually ended up uniting the entire country as a response. For that, I thank you. Now, finally, when we're talking about companies doing rebrands, marketing efforts, efforts to refresh the company, we have a couple examples to look at here. Cracker Barrel obviously has not been a great example of this, but one that has been incredibly good is American Eagle. Of course, it started off with the Sidney Sweeney advertisement, which brought American Eagle back into the forefront of people's minds. American Eagle is a brand that hasn't been that relevant since 10, 15 years ago. The last time I remember this brand being relevant was high school. And here we have it making headline after headline. It's in the forefront of people's minds. They're coming out with all these new designs and their marketing efforts have been incredible. But now they've done it again. Signing Travis Kelsey for their new designs, for all their new clothing they're coming out with. And they broadcast this a day after the wedding announcement. Even Bloomberg notes the timing of this and how great this drop was timed, directly following Kelsey's blockbuster engagement to pop sensation and billionaire Taylor Swift. So there you have it, a company that I don't know who's behind the marketing of this. I actually want to start looking up the team that's doing this because the deals are making the attention they're grabbing from what I thought was a completely irrelevant brand, one that I literally haven't thought of for years. How they're bringing it to everyone's attention is quite remarkable. The marketing strategy of American Eagle needs to be studied. Now, that'll be it for this episode. Hope you enjoyed and see in the next one.