NVIDIA Corp (NVDA, Financial) saw a daily gain of 2.24%, although it experienced a three-month loss of 3.62%. With an Earnings Per Share (EPS) (EPS) of 4.14, the question arises: is NVIDIA (NVDA) modestly overvalued? This article will delve into a valuation analysis of NVIDIA, providing insights to help you make informed investment decisions.
Company Introduction
NVIDIA Corp (NVDA, Financial) is a leading developer of graphics processing units (GPUs). Initially, GPUs were used to enhance computing platforms, especially in PC gaming applications. However, GPUs have since become vital semiconductors in artificial intelligence. NVIDIA offers AI GPUs and a software platform, Cuda, for AI model development and training. NVIDIA is also expanding its data center networking solutions, assisting in handling complex workloads.
At a current share price of $419.34, NVIDIA has a market cap of $1 trillion, which indicates that the stock may be modestly overvalued compared to its fair value (GF Value) of $375.07.
Understanding 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. 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.
Based on GuruFocus' valuation method, NVIDIA (NVDA, Financial) appears to be modestly overvalued. Therefore, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. NVIDIA has a cash-to-debt ratio of 1.46, which ranks worse than 57.19% of 904 companies in the Semiconductors industry. However, the overall financial strength of NVIDIA is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. NVIDIA has been profitable 10 years over the past 10 years. Over the past twelve months, the company had a revenue of $32.70 billion and EPS of $4.14. Its operating margin is 33.04%, which ranks better than 94.96% of 952 companies in the Semiconductors industry. Overall, GuruFocus ranks the profitability of NVIDIA at 10 out of 10, which indicates strong profitability.
Growth is probably the most important 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. The 3-year average annual revenue growth rate of NVIDIA is 34.5%, which ranks better than 87.61% of 872 companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 20.1%, which ranks worse than 52.52% of 775 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 16.55.
Conclusion
Overall, NVIDIA (NVDA, Financial) stock appears to be modestly overvalued. The company's financial condition is strong, and its profitability is strong. Its growth ranks worse than 52.52% of 775 companies in the Semiconductors industry. To learn more about NVIDIA stock, you can check out its 30-Year Financials here.
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