Investors frequently grapple with the challenge of determining whether a stock like NVIDIA Corp (NVDA, Financial) is trading at a fair value. With a recent price of $466.27 and a slight daily decline of 1.85%, contrasted against a 3-month gain of 3.17%, the question of fair valuation becomes even more pertinent. The company boasts a robust Earnings Per Share (EPS) of 7.58. But does this financial snapshot suggest that NVIDIA is fairly valued? This article embarks on a valuation analysis journey to address this inquiry.
Company Introduction
NVIDIA Corp (NVDA, Financial) is renowned for its pioneering role in graphics processing unit (GPU) development. Initially, GPUs were pivotal in enhancing computing experiences, particularly for PC gaming. However, NVIDIA's GPUs have evolved to become integral in artificial intelligence (AI) applications. Beyond hardware, NVIDIA offers Cuda, a comprehensive software platform for AI model development and training. The company is also making strides in data center networking solutions, facilitating complex workloads through GPU integration. A comparison between NVIDIA's stock price and the GF Value—an estimate of its fair value—sets the stage for a deeper examination of the company's valuation.
Summarize GF Value
The GF Value is a unique intrinsic value metric, calculated based on historical trading multiples, a GuruFocus adjustment factor reflecting past performance and growth, and future business performance forecasts. This GF Value Line suggests a stock's fair trading value. If a stock's price significantly exceeds this line, it may be overvalued and could yield poor future returns. Conversely, if the price is well below this line, the stock might be undervalued, possibly leading to higher future returns.
According to GuruFocus' valuation method, NVIDIA (NVDA, Financial) seems fairly valued. The GF Value pegs the stock's fair value by factoring in historical multiples, an internal adjustment based on NVIDIA's past business growth, and analyst estimates of future business performance. At its current price of $466.27 per share, NVIDIA stock appears to be trading at a fair value. This assessment suggests that NVIDIA's long-term stock return could align closely with its business growth rate.
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Financial Strength
Investing in companies with weak financial strength carries a higher risk of permanent capital loss. Therefore, examining a company's financial strength is crucial before purchasing its stock. Key indicators such as the cash-to-debt ratio and interest coverage can provide insights into a company's financial health. NVIDIA's cash-to-debt ratio stands at 1.66, which is lower than 50.31% of its peers in the Semiconductors industry. However, GuruFocus ranks NVIDIA's overall financial strength at 8 out of 10, highlighting the company's strong financial position.
Profitability and Growth
Investing in profitable companies, especially those with a history of consistent profitability, tends to be less risky. Companies with high profit margins are generally safer investment choices. NVIDIA has maintained profitability over the past decade. In the last twelve months, it recorded revenues of $44.90 billion with an Earnings Per Share (EPS) of $7.58. Its operating margin of 45.94% outperforms 98.64% of its industry counterparts. NVIDIA's profitability is ranked 10 out of 10, signifying exceptional strength.
Growth is a pivotal valuation factor, as it is closely tied to long-term stock performance. A company that grows quickly creates more shareholder value, particularly when the growth is profitable. NVIDIA's 3-year average annual revenue growth is 34.5%, ranking it above 87.23% of its industry peers. However, its 3-year average EBITDA growth rate of 20.1% is lower than 52.13% of the companies in the Semiconductors industry.
ROIC vs. WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) is another profitability evaluation method. The ROIC indicates how efficiently a company generates cash flow relative to its invested capital, whereas the WACC represents the average rate a company pays to finance its assets. When ROIC exceeds WACC, it suggests value creation for shareholders. NVIDIA's ROIC over the last 12 months is an impressive 71.06, vastly surpassing its WACC of 17.63.
Conclusion
In conclusion, NVIDIA Corp (NVDA, Financial) appears to be fairly valued. The company's financial health is robust and its profitability is exceptionally strong. Despite its growth ranking below 52.13% of companies in the Semiconductors industry, NVIDIA's financials are solid. To delve deeper into NVIDIA's financial history, you can explore its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
