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Apple unveiled a new revolutionary product this week.
The $3,499 Apple Vision Pro “spatial computing” headset made waves in the technology community as the world’s largest company introduced their first new product in nearly a decade.
The technology appears to be revolutionary. But if you’re an investor in Apple’s stock, you should be focusing less on the technology and more on the earnings this product could generate…
…because that what will make their stock go up.
What Makes Stocks Go Up?
Everyone wants to know what makes stocks “go up.”
In 2020, all a CEO had to do was mention the word “disruption” and their stock popped higher.
It was the same in 2021; if management mentioned they were using “digital assets” on an earnings call their stock went up.
And in 2023, if anyone even hints that they’re an “AI company” their shares go to the moon.
But in all three cases, it’s not the words themselves making stocks go up.
Rather, it’s the expectation of future earnings growth.
A Primer on Earnings
You may have heard people talk about “earnings” or “earnings reports” before.
When you hear someone saying this, they are referring to how much a company earned in total profit - the amount of money a business makes after subtracting all its expenses - in the latest quarter or year.
It's the difference between the revenue (the money a business earns from sales) and the costs (the money a business spends to produce and sell its products or services).
And growing these earnings consistently is key to making a stock go up.
The Oldest Rule in the Book
Stocks are priced based on their earnings.
Whether it’s the expectation of how much a stock will grow in the future or previous earnings performance, earnings and the “earnings multiple” – which we’ll get to in a future issue of this newsletter – are the keys to understanding what drives stock market returns.
Historical data supports the correlation between earnings and stock prices. A comprehensive analysis conducted by Research Affiliates, a leading investment advisory firm, found a strong positive relationship between earnings growth and stock returns over the long term.
But don’t take my word for it; look at how expected earnings growth for the entire S&P 500 correlates with the S&P 500 itself:
Notice I’m saying “expected” earnngs growth. Because when it comes to investing, you shouldn’t care as much about what a company did in the past…
As with Apple, investors already know the company will sell loads of iPhones and Macbooks. They want to know what’s coming next (like the Apple Vision Pro) to drive earnings even higher.
…you want to focus on where the company is headed. And finding companies with the potential for explosive earnings growth is the best way to identify a stock that will potentially “go up.”
Future Earnings Drive the Market
Fortinet (FTNT) and Advanced Micro Devices (AMD) saw their share prices surge 917% and 1,010%, respectively, between 2018 and 2021.
And between 2015 and 2018, NVIDIA Corp. (NVDA) and Netflix (NFLX) saw their share prices rise 1,361% and 482%, respectively.
These four companies have one thing in common; they all grew their earnings between 450% and 4,000% on the back of “mega trends."
We’ve talked about investing “mega trends” a few times in this newsletter. These include things like:
The Digitization of Everything: artificial intellgience, internet of things
The Biotech Revolution: hyper-personalized medicine, medical robotics
Agricultural Sustainability: water management, genetic engineering
Deglobalization: localized manufacturing, re-shoring
Next Gen Investors: digital payments, peer-to-peer lending, robo-advisors
But from an investing perspective, the importance of recognizing mega trends early on - like Apple’s spatial computing headset - has little to do with the actual technology.
Rather, it has to do with how much earnings growth these mega trends will generate.
Grab Your Surfboard (And Get in the Water)
These megatrends are not just fleeting fads; they hold the key to exceptional earnings growth.
Remember, standing still is not an option. By the time everyone is using a revolutionary product, the “future earnings” will likely be priced into the stock (i.e. it will have already “gone up”).
Instead, you need to strap on your surfboard and ride the wave of change…
…because the opportunities before us are abundant. But they won't wait around forever.
And if you don’t, someone else will.
Stay safe out there,
Robert