The Only Metric You Need To Know

If you listen to the financial media and the "smart" money, they will run you through many complicated metrics they say drive a stock's success.

We have been active in the financial markets now for over three decades. During that time, we figured out that a stock's performance really only comes down to just a few key metrics.

Those readers who have followed us for the last few years are familiar with those metrics.

Today, we wanted to highlight THE single most important of those metrics.

If we were asked to look at only ONE metric to figure out what a stock will do – THIS would be the metric we would want.

The metric is EARNINGS REVISIONS.

Let's define what we mean by that term.

First, let's focus on the second part of that term – the "revisions."

You may be familiar with it, but most stocks of a reasonable size have a group of analysts covering the stock. These analysts work for the various brokerages and investment banks.

People who work for those companies are called "sell-side" analysts. They "sell" their services to the "buy-side" or buyers of the stock who run the mutual and hedge funds.

Depending on the size and liquidity, there might be just a few analysts or many.

Let's discuss everyone's favorite stock – NVIDIA Corporation (NASDAQ: NVDA).

Right now, 72 (!) analysts cover the stock. Not all of them will have full financial models with all the metrics, but most will have one.

“Revisions” refers to the change in those estimates.

Let's focus on the first part of that term – the "earnings."

Most larger companies are driven by their revisions to their earning per share or "EPS." 

Some industries, though, may key off another measure of "core" profitability called earnings before interest, taxes, depreciation, and amortization" or "EBITDA." This is a decent proxy for the earnings of the core business without considering the balance sheet.

Finally, there are even some companies where the revisions that count the most are revenue.

We use the term "earnings revisions" because 90%+ of stocks key off an earnings metric, but it could also be termed "the most closely followed metric revisions." That one doesn't exactly roll off the tongue, though!

Returning to NVDA, let's look at a chart of the earnings revision for 2024 EPS and the stock price. Here is that chart…

The blue line is the estimate for 2025 EPS, and the white line is the stock price.

Want to know why $NVDA stock has been +333% since a year ago?

The analyst's earnings estimates across that time have gone from $0.60 for 2024 to $2.70 today. That is an upward revision of +350%.

The stock has gone up pretty much one-for-one with the earnings revisions!

Want to see another example from recent history?

Here is the same chart for Meta Platforms, Inc. (NASDAQ: META) – the parent company of Facebook, Instagram and WhatsApp.

Again, the blue line is the estimate for EPS, and the white line is the stock price.

This example shows you both the impact of negative AND positive earnings revisions. META got crushed as their earnings estimates were cut in half in 2021/22. Then, the stock recovered all of that and more as the estimates recovered.

A critic would say this is great, but this is all backward-looking data.

We agree, but focusing on the earnings revisions is a great place to start if you are trying to figure out where a stock will go.

Your view on whether revisions will be positive or negative could be based on a fundamental analysis of the business, its industry, and competitive positioning. We do a lot of this type of analysis.

Do you follow earnings revisions on the companies you own? Tell us more at [email protected] or in the comments section online.

We also, however, have a lot of respect for what we call “operational momentum.”

This means we look at what the company has already been doing.

Companies that have been seeing negative earnings revisions for an extended period will tend to continue to see them.

You can see in the META chart that the estimates did not see any material bounce from August 2021 until February 2023. Does this mean you buy the stock on that bounce in estimates?

Maybe. We usually would wait and want to see several more positive revisions. This is what happened in the next couple of months with META.

You would have missed the move from $100 to $200 in the stock or a double. With the stock now at $500, though, we don't think you would mind.

What does this mean for NVDA?

Right now – nothing. As long as estimates continue to increase, we think the stock will also go higher.

Watch out once these estimates flatten out and/or start going lower. Given the momentum in the stock, it could easily be down -20% or more from current levels.

The key to all of it is focusing on this ONE KEY METRIC.