On August 13, 2023, NVIDIA Corp (NVDA, Financial) experienced a daily loss of 3.62%, bringing its 3-month gain to 42.97%. With an Earnings Per Share (EPS) of 1.92, the question arises: is the stock significantly overvalued? This article aims to provide a comprehensive valuation analysis of NVIDIA Corp (NVDA). We encourage readers to stay tuned for the detailed breakdown of the company's value.
A Brief Overview of NVIDIA Corp (NVDA, Financial)
NVIDIA is a leading designer of discrete graphics processing units that enhance computing platforms. The firm's chips are used in a variety of end markets, including PC gaming and data centers. In recent years, NVIDIA has expanded its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the firm's products.
Currently, NVIDIA (NVDA, Financial) trades at $408.55 per share, with a market cap of $1 trillion. The company's GF Value, an estimation of fair value, stands at $304.03, indicating a significant overvaluation.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
NVIDIA (NVDA, Financial) appears to be significantly overvalued based on the GuruFocus Value calculation. If the price of a stock 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. Given NVIDIA's significant overvaluation, the long-term return of its stock is likely to be much lower than its future business growth.
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Assessing NVIDIA's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. NVIDIA has a cash-to-debt ratio of 1.27, which ranks worse than 58.3% of companies in the Semiconductors industry. Based on this, GuruFocus ranks NVIDIA's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth of NVIDIA
Companies that have consistently been profitable over the long term offer less risk for investors. NVIDIA has been profitable 10 years over the past decade. Over the past twelve months, the company had a revenue of $25.90 billion and Earnings Per Share (EPS) of $1.92. Its operating margin is 17.37%, which ranks better than 75.94% of companies in the Semiconductors industry. Hence, NVIDIA's profitability is ranked 10 out of 10, indicating strong profitability.
Growth is an essential factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. NVIDIA's 3-year average annual revenue growth rate is 34.5%, which ranks better than 87.77% of companies in the Semiconductors industry. However, its 3-year average EBITDA growth rate is 20.1%, which ranks worse than 53.12% of companies in the Semiconductors industry.
ROIC vs WACC of NVIDIA
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, NVIDIA's return on invested capital is 20.32, and its cost of capital is 16.65.
Conclusion
In summary, the stock of NVIDIA appears to be significantly overvalued. The company's financial condition is strong and its profitability is robust. 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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