NVIDIA Corp (NVDA, Financial) experienced a daily loss of -3.62%, and a 3-month gain of 42.97%, with an Earnings Per Share (EPS) (EPS) of 1.92. This analysis aims to determine if the stock is significantly overvalued. The valuation analysis provided in the following sections is designed to offer insights into NVIDIA's financial position and prospects.
Company Overview
NVIDIA Corp (NVDA, Financial) is a leading designer of discrete graphics processing units that enhance computing platforms. The firm's chips are utilized in various end markets, including PC gaming and data centers. Recently, NVIDIA has expanded its focus from traditional PC graphics applications such as gaming to more complex opportunities, including artificial intelligence and autonomous driving. These new areas leverage the high-performance capabilities of the firm's products. The current stock price is $408.55, which is significantly higher than the GF Value of $303.45, indicating potential overvaluation.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus' valuation method, NVIDIA (NVDA, Financial) is estimated to be significantly overvalued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. With a current price of $408.55 per share and a market cap of $1 trillion, NVIDIA is estimated to be significantly overvalued.
Given that NVIDIA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength Analysis
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to review the financial strength of a company before deciding to buy its stock. A good starting point for understanding the financial strength of a company is to look at the cash-to-debt ratio and interest coverage. NVIDIA has a cash-to-debt ratio of 1.27, which is worse than 58.3% of companies in the Semiconductors industry. However, GuruFocus ranks the overall financial strength of NVIDIA at 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. NVIDIA has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $25.90 billion and an Earnings Per Share (EPS) (EPS) of $1.92. Its operating margin of 17.37% is better than 75.94% of companies in the Semiconductors industry. Overall, GuruFocus ranks NVIDIA's profitability as strong.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of NVIDIA is 34.5%, which ranks better than 87.77% of companies in the Semiconductors industry. However, the 3-year average EBITDA growth is 20.1%, which ranks worse than 53.12% of companies in the Semiconductors industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, NVIDIA's ROIC was 20.32, while its WACC came in at 16.65.
Conclusion
In conclusion, the stock of NVIDIA Corp (NVDA, Financial) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is strong. However, its growth ranks worse than 53.12% of companies in the Semiconductors industry. To learn more about NVIDIA stock, you can check out its 30-Year Financials here.
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