Imagine two companies: Company A and Company B.

For these purposes, let’s say that both of these companies have $100 in revenue and $10 in earnings.

They look identical.

Same sales. Same earnings. Same 10% profit margin.

If both companies are expected to grow earnings at the same rate, they should trade at roughly similar valuations.

But now let’s change one variable.

Company A is expected to grow earnings at 70% per year.

Company B is expected to grow earnings at 10% per year.

Which one deserves a higher valuation?

Company A.

Why?

Because investors are not buying today’s $10 in earnings.

They’re buying the future stream of earnings.

If Company A grows 70%, that $10 becomes $17 next year and compounds rapidly from there.

If Company B grows 10%, that $10 becomes just $11 and doesn’t compound nearly as fast.

Over time, that difference explodes.

That’s why faster-growing companies trade at higher multiples.

The market is willing to pay more today for earnings that are expected to grow much faster tomorrow.

Now let’s expand the scenario further.

Suppose Company A operates in a high-growth technology industry where demand is exploding.

Company B operates in a slow, mature industry like consumer retail.

Even if their current revenue and earnings are the same, investors will typically assign a higher multiple to Company A because its industry tailwinds suggest stronger growth.

Now let’s change one more variable: profitability.

Instead of earning $10 on $100 of revenue, imagine Company A expands margins dramatically and now earns $56 on $100 of revenue – a 56% profit margin.

Company B’s profit margin falls to just 3%.

Which company should trade at a higher valuation?

The one generating $56 in profit.

Higher margins mean:

• More pricing power

• More operating leverage

• More free cash flow

• More ability to reinvest or return capital

A company converting 56% of revenue into profit is fundamentally more powerful than one converting 3%.

So now Company A has:

• Faster growth

• Stronger industry tailwinds

• Massive margin expansion

Company A should trade at a significantly higher multiple than the slow-growth, low-margin peer.

Yet in today’s stock market this somehow isn’t the case.

Maybe you guessed that Company A is Nvidia (NVDA) and Company B is Walmart (WMT).

In addition to the strong numbers mentioned above, Nvidia just reported earnings on Wednesday evening that showed:

• Revenue: $68.13B vs. $66.21B expected

• Earnings Per Share: $1.62 vs. $1.53 expected

• Next quarter guidance: $78B – well above estimates

These are record numbers for the most dominant AI company on the planet.

And CEO Jensen Huang didn’t hold back when talking about future demand.

“Computing demand is growing exponentially… Enterprise adoption of agents is skyrocketing. Our customers are racing to invest in AI compute.”

Nvidia has everything going for it except the valuation.

The stock now trades at just 17.6x next year’s earnings.

There are 265 companies in the S&P 500 with higher forward P/E ratios than Nvidia.

At number 266, Nvidia is sandwiched between A.O. Smith and Broadridge Financial Solutions.

Two companies I’ve literally never heard of.

Some other companies trading at higher forward valuations than Nvidia include:

• Coca-Cola.

• McDonald’s.

• Procter & Gamble.

• Norfolk Southern.

• Tractor Supply Co.

• American Water Works.

• Republic Services – a literal trash company.

• And yes… Walmart.

Are any of these businesses expected to grow earnings 70% this year?

Are any of them powering trillion-dollar data center buildouts?

Are any of them the backbone of artificial intelligence infrastructure?

They are all fine companies.

But they are not Nvidia.

And if valuation is supposed to reflect future earnings power, profitability, and industry positioning, then Nvidia does not deserve to be trading alongside slow-growth retail and industrial brands.

Either:

1. Nvidia’s growth is about to collapse, margins are about to compress, and AI demand is about to evaporate…

Or

2. The market is temporarily mispricing the most important AI company in the world.

I know which outcome I’m betting on.

Own the stock.