NVDA is in stage #2. The stock rallied very hard and there is a lot of controversy about this stock and the company it represents. We have a strong cult built around the stock. People would die defending it and they buy no matter what. And these people were awarded sticking to their guns further empowering their cult-like mentality. Then there is a whole other group of bears saying that this stock is crazy, the run unsustainable and the stock is overpriced. The rest don’t know how to value this company. And it is a problem. It is extremely hard to value NVDA and predict its future outcomes. Even if we step way far away to see the whole picture.

 

 

NVDA went public in 1999 and it had a tremendous journey but also many volatile moves. If you bought in 1999 you had to had a very strong stomach to stay invested. It got crushed in 2000-2003 and again in 2008-2009. And after that, six years of going nowhere. At the end of 2015 the stock started moving and it was a huge move. One can ask, is it investable at this levels? What is the fair value?

 

 

The stock made new all time highs these days and its recent earnings report was a blast. But it is currently at its peak and I think it may be prudent to wait for a correction. September 2022 was a good time to jump in. But who knew, right? I wouldn’t wait for a correction of 2022 bear market’s magnitude, but a simple pullback when investors start freaking out about something. And there is always something they freak out about. It would be great if the stock goes and closes the gap we can see on a daily chart between 320 and 380. That would be a great opportunity. But is it investable at these levels? Where is the intrinsic value?

 

 

NVDA revenue skyrocketed. It is an unprecedented growth. It grows a staggering 35% on 5-year average and 101% annual average! This is mind blowing.
The company’s free cash flow is growing at 634% annually and 50% 5-year average!

 

 

EPS is growing by 41% on 5-year average and 852% annual average. The well established companies like Apple, Amazon, and Google cannot beat this growth!

 

 

But just to find something bad about NVDA, let’s look at their debt. For years NVDA had enough cash on hand and low debt. That has changed recently. Little to no cash and rising debt:

 

 

NVDA pays dividends but it is a very small portion. It pays 0.16 annual dividend (0.03% yield) and hasn’t increased the dividend since 2018. In this light, the stock is pretty much just a growth stock:

 

 

NVDA has a constant level of shares outstanding. It doesn’t dilute. They buy some shares back but it is also insignificant (0.68% buy back). In this case, it hold steady:

 

 

NVDA spends a lot of money in research (almost 2.5 billion dollars). It is a lot of cash. It spend money on AI chip development which currently is behind the enormous growth drive. This could be a potential issue in the future. Will AI keep driving public interest and thus corporate earnings? Or will it fade away? If it fades away and new darling emerges which would propel NVDA higher, all will be good, but if not, we may see a rapid decline. The same decline as we saw in virtual reality, or 3D printing, or Bitcoin, SPACs, and all other faves that went eventually nowhere.

 

 

And we also see rapid employee growth (maybe good for the US economy).

 

 

This is all good but is it good to justify the current price and make it an investable stock? A consensus of analysts were expecting the company to earn $2.09 per share on $11.09B in revenue. Instead, the company reported $2.70 in earnings per share. This is a stunning 429% year-over-year increase in earnings!

In addition to this the company reported $13.57B in sales vs. the expected $11.09B, which is a remarkable 101% increase over the same comparable quarter last year! But wait, the story does not end there. Looking ahead, Nvidia (NVDA) said it expects third-quarter sales at $16B, plus or minus 2%, well above the $12.5B that analysts were expecting. In addition to this, the Jensen Huang-led company approved $25B in share buybacks and said it would continue to buy back stock this fiscal year.

The stock was only up 0.10% on Thursday after their report and the Nasdaq was down 257 points. What gives? It would seem that the market was more afraid of what Jerome Powell would say at Jackson Hole the next day instead of reveling in NVIDIAS’ astonishing report.

Nevertheless, the question is where is the fair value of this stock? That is a hard question and it also depends on how risk you are willing to take.

If we look at the current 2023 valuation, the stock’s fair value based on the earnings and future estimates is at $289.15 a share (current price $460.18).

The fair value for 2024, if everything stays unchanged and the company keeps delivering as expected, will be at $439.71 a share.

The 2025 fair value is $488.71 as of today. At the current price, the stock is trading at 2025 fair value!

 

 

There is a lot of risk if we buy the stock now (overpriced) expecting that it will exceed the future valuation. It may not happen. The stock may drop as AI fades. This continues to be a high-risk stock in a high-flying sector. A better chip for AI could come along from a competitor like AMD. Rising interest rates would take a toll on NVDA’s share if that were to happen. An economic and earnings recession would also be very dangerous for the stock. As of now, there is not one in site, but after 14 years of growth, we are overdue for one. Geopolitical and political turmoil at home (United States) are also risks. Are you willing to take that risk? If so, I would recommend a very small position.

 

 

The stock is now MODERATE BUY
 

This post was published in our newsletter to our subscribers on Sunday, August 26th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.