As of September 06, 2023, NVIDIA Corp (NVDA, Financial) experienced a daily loss of -1.35%, but has shown a 3-month gain of 23.95%. The company's Earnings Per Share (EPS) stand at 4.14. Given these figures, the question arises: is the stock significantly overvalued? This article provides a comprehensive valuation analysis to answer this question. Keep reading to gain valuable insights.
Company Introduction
NVIDIA is a leading developer of graphics processing units (GPUs). Traditionally, GPUs were used to enhance the experience on computing platforms, most notably in gaming applications on PCs. However, GPU use cases have since emerged as crucial semiconductors used in artificial intelligence. NVIDIA not only offers AI GPUs but also a software platform, Cuda, used for AI model development and training. NVIDIA is also expanding its data center networking solutions, helping to tie GPUs together to handle complex workloads.
At its current price of $478.91 per share, NVIDIA (NVDA, Financial) has a market cap of $1.20 trillion. When comparing this with the company's GF Value of $353.25, NVIDIA appears to be significantly overvalued.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line on the summary page gives an overview of the fair value at which the stock should 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. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. In the case of NVIDIA (NVDA, Financial), the stock shows every sign of being significantly overvalued.
Because 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
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Therefore, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. A great starting point for understanding the financial strength of a company is looking at the cash-to-debt ratio and interest coverage. NVIDIA has a cash-to-debt ratio of 1.46, which is worse than 57.21% of 895 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 $32.70 billion and Earnings Per Share (EPS) of $4.14. Its operating margin of 33.04% is better than 95.1% of 938 companies in the Semiconductors industry. Overall, GuruFocus ranks NVIDIA's profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of NVIDIA is 34.5%, which ranks better than 87.83% of 863 companies in the Semiconductors industry. However, the 3-year average EBITDA growth rate is 20.1%, which ranks worse than 53.06% of 767 companies in the Semiconductors industry.
ROIC vs WACC
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 41.26, and its cost of capital is 16.35.
Conclusion
Overall, NVIDIA (NVDA, Financial) stock shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is robust. However, its growth ranks worse than 53.06% of 767 companies in the Semiconductors industry. To learn more about NVIDIA stock, you can check out its 30-Year Financials here.
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