Nvidia’s Incredible Growth Was Driven by 3 Key But Overlooked Factors

Hard as it may be to believe, Nvidia’s profitability is more astonishing than you might think

The company’s second-quarter profit was a staggering 168% higher than the profit in the same quarter last year. If Nividia had made the same profit in the other two quarters of the year, it would have been the fourth most profitable company in the Fortune 500 (behind Apple, Berkshire Hathaway, Alphabet, and Microsoft). Still, Wall Street analysts expect Nividia’s profits to continue to grow this year — and analysts have, on average, underestimated Nividia’s results so far.

Even more impressive is Nvidia’s profitability across multiple metrics. I have long favored metrics based on economic profit, also known as economic value added (EVA), which eliminates the distortions in standard accounting. Institutional Shareholder Services calculates EVA data for 21,000 public companies worldwide and reports that Nvidia’s returns on capital and its growth trend rank it in the top 100^t percentile of profitability. This does not mean that Nvidia is in the top percentile (which would be 99^t percentile). This means that Nvidia ranks higher than all of the other 21,000 companies, or perhaps even on par with some of them.

This is simply phenomenal. When Nvidia’s profit growth slows, as it eventually must, the company could still find itself in the 95th^t percentile — or, heck, even in those miserable 85^t percentile — and continue to achieve excellent financial results.

CEO Jensen Huang’s early life was tougher than you probably think, and that helps explain his successful leadership

Huang made headlines in March when he spoke to students at his alma mater, Stanford University. “Greatness is not intelligence,” he told them. “Greatness comes from character, and character is not formed by intelligent people. It is formed by people who have suffered.”

He didn’t go into much detail about his personal life at the event, though he often mentioned that he used to be a dishwasher at Denny’s “and then they promoted me to busboy.” But he was much more open about his formative years when he spoke with Fortune 23 years ago:

In 1973, 9-year-old Huang was living in Thailand with his Chinese parents. Concerned about the political situation there, his parents decided to send him to an American boarding school his uncle had found in a magazine ad. Huang was soon enrolled at Oneida Baptist Institute in Oneida, Kentucky. … It turned out the institute was a school for troubled kids. Huang’s 17-year-old roommate had just been released from prison and was covered in stab wounds. Huang says that during his two years at the school, he was often beaten and spent his afternoons cleaning the latrine. Still, he considers those days a valuable experience. “I’m rarely scared now. I don’t worry about going places I’ve never been before,” Huang says, “and I can handle a lot of discomfort.”

Suffering remains central to Huang’s leadership. “I still use the term ‘pain and suffering’ with great joy in our company,” he told Stanford students. “You want to improve the character of your company. You want greatness from them.”

Huang will wait years for his sentences to be carried out

CEOs often complain that Wall Street won’t let them pursue long-term projects that won’t pay off until far in the future. Huang insisted on pursuing such projects anyway. Investors should know that Nvidia’s history is one of spending years creating technology that doesn’t have a market until the technology creates a market.

Nvidia’s first project was to design chips to create 3D graphics for video games, when video games barely existed. The chips eventually supercharged the gaming industry and made Nvidia a success. Huang and his partners knew the same technology could do much more, including powering a new way of computing that would become artificial intelligence. But “for 10, 15 years, the markets that drive Nvidia today just didn’t exist,” Huang says. “All your shareholders, your board of directors, your partners—you take everyone with you, and there’s no evidence that there’s a market. It’s really, really hard.”

Huang’s experience is a warning to Nvidia investors that one day, after today’s AI frenzy, there may come a time when they will have to be patient. It is also an inspiration to business leaders that pain and suffering will pay dividends, and that persistence and confidence can pay off, sometimes spectacularly.

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