Since our last buy rating on Nvidia (NASDAQ:NVDA) at $160 last November, the stock has returned a stunning 73.20%. The article called "Goodbye Crypto, Hello AI" may have been ahead of its time, as it was released shortly after ChatGPT in December.
This time we have taken another look at the company, although we think investors may need to be more cautious, as we think the stock price may be ahead of its fundamentals. While we still affirm our expectation that Nvidia will exceed a market cap of $1T in the future, we think it may take longer than investors currently expect, given its underlying profitability, relative valuation and measures such as EV/EBIT and Price to Free Cash Flow.
We will explain why we currently put Nvidia on a "hold," at what price we would buy again, looking at fundamentals, and when we think Nvidia can still join the trillion-dollar club in the distant future.
Shiny Object Syndrome?
Last week, at Nvidia's annual global AI conference (GTC), the genius of CEO Jensen Huang was once again on display, explaining the progress the company has made in accelerated computing. It showed once again how Jensen's rightful commitment to accelerated computing is once again paying off, this time with their main focus shifting from Gaming to AI.
But it leaves us with a burning question, whether the rise in share price is justified hype, or just investors chasing the shiny object syndrome now that the stock has nearly doubled in the last 3 months. Especially since the presentation has already been viewed over 22 million times in 1 week, capturing the attention of the retail audience. This even surpasses other events in which many retail investors participate, such as the unveiling of a new Tesla (TSLA), which typically receives 10 million views.
To track developments in the AI landscape, we often use Metaculus as a proxy of where AI, more specifically machine learning, is headed in the distant future. Metaculus collects predictions, and uses a special method to reward participants who are right, and more right than the general community, which has proven to generally outperform the median of other prediction methods.
As for when a "Weakly General AI" will become publicly known, the time frame has shortened a lot in recent months, as forecasters now expect a weak artificial general intelligence to be here by May 2026, rather than November 2027 earlier this year.
This follows a trend in recent years, where people who predicted the advancement of AI constantly underestimated the extent of developments in this field, until certain products such as ChatGPT from OpenAI finally hit the market.
We ourselves have also been guilty of such a mistake, predicting that the real deal, "Artificial General Intelligence," would be at least 15 years away. But since we launched that article in November with new information, the time frame of forecasters expecting Artificial General Intelligence has dropped from 2040 to November 2031.
That means most of our forecasts were probably not aggressive enough in predicting future revenue and free cash flow. Other experts and researchers in the field of AI, along with other leaders in the technology such as Elon Musk and Steve Wozniak, even called for a pause in AI development earlier this week in an open letter signed more than 2,200 times.
The shorter timeline for progress in AI can be attributed to new developments by OpenAI (GPT-4), Google's (GOOG) Bard, among other scientific discoveries by AI researchers.
Hitting A Wall
Perhaps the hype surrounding the AI revolution is justified, as it will arguably contribute to massive increases in productivity or the replacement of many service sector jobs worldwide, with an estimated market size of $15.7 trillion by 2025.
Although, it is also easy to be fooled by such a huge addressable TAM, and justify buying the company at any given price. In fact, we think the trade of the past few months may be more of a buying frenzy, following a lot of positive news around Nvidia's AI event, along with new rollouts like GPT-4. It wouldn't be the first time such action has been seen either, as BuzzFeed (BZFD) shares quadrupled in just 2 days, after they announced plans to implement AI in article writing. The optimism was short-lived, however, as reality struck again, and the stock plummeted 75%, back to where it was trading before the announcement.
We think the price action, with the stock price going almost vertical and rising 5% a week to date, is not sustainable and is likely to hit a wall, similar to the price action observed in late 2021, when there was a shortage of GPU's for both mining & gaming.
From a long-term technical perspective based on Fibonacci retracement levels, we see much more downside risk, not ruling out a retracement back to the $100-180 levels, while upside risk is more likely to be capped by the current underlying fundamentals, which we will address in a moment.
The 157% rise in the share price from its low last October is also at odds with current economic uncertainties, with Fed Funds rates currently at 5% and a recession as a fairly likely scenario, now that the 2-10 yield curve inverted last month for the most since the 1980s. We believe these headwinds also apply to Nvidia, and investors may need to proceed with extreme caution.
Management and directors have also not been shy about selling shares on the open market, with some directors selling shares for tens of millions of dollars, despite the shiny prospects for AI's future. In this case, we would strongly choose to attach more importance to the actions of management and directors than to their words.
The story about Nvidia's huge growth prospects when it comes to AI only goes so far as the fundamentals supporting such an elevated stock price, which are not (yet) up to par.
From a free cash flow perspective, Nvidia is currently pulling in $1.74BN as of last quarter, or an annual rate of $6.96BN. This is in stark contrast to its market cap, which currently stands at $686 billion. In recent history, perhaps the only company of this size that we have seen trade nearly above 100x Free Cash Flow was Tesla, which was eventually compressed all the way to 43x Free Cash Flow (TTM) earlier this year.
It may also be a cautionary tale, as Tesla fell sharply from a $1.23T valuation to $324B as it entered an environment of higher interest rates and severe macroeconomic and competitive headwinds.
Not that Nvidia does not deserve such multiples, but it does take away virtually all margins of safety, as other large-cap tech stocks typically trade around a P/FCF multiple of 20 over the long term. At Nvidia's current valuation of $686BN, we believe investors have already priced in $34.3BN of annual free cash flow against a 20x P/FCF multiple, or nearly 5x the current free cash flow, which is $6.96BN annualized. Therefore, we see absolutely no margin of safety from current price levels, because if this priced-in free cash flow level doesn't get realized, the stock could theoretically fall by 80%. At 20x Free Cash Flow of $6.96BN, the downside scenario, although very unlikely, would mean a valuation of $139.2BN, or $56.36 per share.
Even from other angles, such as EV/EBIT and EV/EBITDA, we find it extremely difficult to justify the valuation, as it is currently much more expensive even than Tesla, at 151.70x EV/EBIT. And it's not like Nvidia is a needle in a haystack compared to the other large-cap tech companies it is now part of. Rather, it sticks out of a plain like Himalayan peaks, relative to companies like Alphabet and Meta (META) that trade around 17x EV/EBIT.
And we are not shy about bundling Nvidia with these other large-cap tech companies because Nvidia only needs a 45.75% rise to reach the trillion-dollar club from current levels. At its current pace of a 5% gain in share price per week so far this year, it would reach that valuation before the second quarter is over. A valuation of $1T implies a current share price of about $404.86.
To join that trillion-dollar club, at 20x P/FCF, Nvidia would have to accomplish the feat of generating an immense $50BN of FCF annually, which is an even starker contrast to the nearly $7BN FCF on an annualized basis in the fourth quarter. Even from an EV/EBITDA perspective, it is difficult to fathom the growth already priced in. For Nvidia to outperform the historical S&P 500, the company would have to be worth at least $1.34T by 2030, assuming current price levels and an average 10% annual gain. That means that at a 18x EV/EBITDA multiple, Nvidia would need to bring in $74BN in EBITDA by 2030. Currently, EBITDA is $6.73BN on an annualized basis.
In other words, if Nvidia wants to get on par with the average return of the S&P 500 in recent history, EBITDA would need to grow at a CAGR of 40.84%. Needless to say, in this scenario, we believe the downside risks far outweigh the rewards, even if Nvidia can grow EBITDA more than 40% a year.
Speculators have also recently bet on a sharp decline in Nvidia's share price while the stock has risen, with the out of the money Put/Call ratio again at 52-week highs with a ratio of more than 2x.
Similarly, we think there are other options that are actually quite reasonably priced to get exposure to AI, although Nvidia remains the leader when it comes to their AI software stack, and hardware that currently remains the industry standard.
But when looking at hardware, it is important to understand that Nvidia's hardware is primarily manufactured by Taiwan Semiconductor (TSM). It is likely that TSMC will also benefit greatly from AI, as the assumed AI revolution will require large amounts of computing power, increasing demand for semiconductor manufacturing. In our view, TSMC has an excellent position in this story, although it is currently seemingly overlooked at 27x P/FCF or just 13x EV/EBIT.
Warren Buffett's Berkshire Hathaway considered a position in the chipmaker earlier this year, but unconventionally stepped out of that position the following quarter.
As a side note, we would point out that there may be something to be said for Nvidia being able to exert more operating leverage than TSMC, and that it is not apples to apples because TSMC is generally tied to its CapEx-weighted nature. As Charlie Munger said in the recent Daily Journal meeting:
In the semiconductor industry, you have to take all the money you've made, and with each new generation of chips, you throw in all the money you previously made. So it's compulsory investment of everything you want to stay in the game. Naturally, I hate a business like that... Now, if you're now ahead of it, like Taiwan Semiconductor is, that may be a good buy at these prices.
Currently, according to estimates from Seeking Alpha, Nvidia is expected to have earnings per share of $7.82 by 2025, meaning it is currently trading at a staggering 35.01x 2025 forward earnings.
Even looking at other high-growth companies like Tesla, they are only expected to trade at around 28.20x 2025 forward P/E. Given that Nvidia's earnings growth is expected to be around 36% over the next few years, in this scenario we would adopt a PEG ratio, or price to earnings to growth of 1, or be very reluctant to buy the stock above 36x forward earnings of $4.49, which would equate to $161.64 per share.
The Bottom Line
While there have been many developments around AI in recent months, we think investors have moved too far away from the fundamentals of Nvidia and are currently more likely to be in a "buy at any price," mode as the company is trading at over 100x FCF annualized for Q4, or 151x EV/EBIT.
We are big fans of the ability to buy companies with a wide margin of safety, which seem extremely difficult to justify at current price levels. As mentioned earlier, at a market multiple of 18x EV/EBITDA in 2030, Nvidia would need to grow EBITDA at a CAGR of 40.84% over the next 7 years to reach the historical average of 10% to rival the S&P 500. In other words, it leaves very little room for additional alpha, above these benchmarks, while at the same time taking on additional risk through all this future growth that is currently being priced in, and the price swings that come with it.
Artificial intelligence can be revolutionary, but we are currently very cautious, as we think some rationality is needed here. We are currently having Nvidia as a "hold" until we clearly see a drastic change in the underlying fundamentals or until a new buying opportunity arises. Nvidia may be on its way to the trillion dollar club, although exponential free cash flow will likely have to present itself first.
This article was written by
Long-term, Equity & Macro Research.Providing independent research with a unique perspective on publicly traded equities and other securities. Our thesis is short: if we can find exorbitant value in it, with an ample margin of safety, it becomes part of our portfolio. Wright's Research prefers a fundamentally driven investment model based on rational thinking and quantitative measures, also incorporating the fast pace of innovation by considering factors such as cost declines and adoption rates, to provide exposure to growth and innovation at a fair price. We adopt a bottom-up strategy and consider changes in the macroeconomic environment in our investment strategies.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Plus, given the stock's CAGR of 35% over the past five years, if Nvidia continues along its current trajectory, it could easily become a trillion-dollar stock by 2025.Can Nvidia reach $1000? ›
As reported, Nvidia (NVDA) share value is expected to reach up to $1000 by 2030 through a steady and gradual rise with forecasts for each year until then; $390 for 2023, $420 for 2024, $570 for 2025 and so on.Where will Nvidia be in 10 years? ›
Nvidia is set for terrific growth over the next 10 years
Analysts are expecting a turnaround in the company's fortunes in the current fiscal year, forecasting an 11% increase in revenue. Nvidia is projected to deliver stronger revenue growth of 24% in fiscal 2025, generating $37 billion.
Compare NVDA With Other Stocks.
|NVIDIA Quarterly Free Cash Flow|
Stock Price Forecast
The 40 analysts offering 12-month price forecasts for NVIDIA Corp have a median target of 300.00, with a high estimate of 355.00 and a low estimate of 175.00. The median estimate represents a +3.88% increase from the last price of 288.79.
Nvidia. The third surprising stock you'd never have guessed Warren Buffett owns is graphics card and semiconductor solutions specialist Nvidia (NVDA 1.10%). New England Asset Management's third-quarter 13F showed it held 3,050 shares of Nvidia.How much will nvidia be in 5 years? ›
Wallet Investor's NVIDIA 5-year stock forecast suggested that the share price could climb to $289.098 by September 2027. The NVIDIA 5-year stock forecast from Coin Price Forecast indicated that the share price could climb to $520 by the end of 2027, up from $370 at the end of 2025, and $160 at the end of 2022.Is Nvidia a strong buy now? ›
Nvidia currently has an average brokerage recommendation (ABR) of 1.48, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 32 brokerage firms. An ABR of 1.48 approximates between Strong Buy and Buy.Is Nvidia still a buy? ›
Analysts expect Nvidia earnings to rebound 34.3% in fiscal 2024, on a 10.8% sales increase. Out of 47 analysts covering NVDA stock, 32 rate it a buy.Will Nvidia share price rise? ›
Taking into account its new AI inference offerings and the stock's price/earnings to growth or PEG valuations, Nvidia Corporation has the potential to rise by a further +12% to $300 or higher in the current year.
According to our NVIDIA stock prediction for 2025, NVDA stock will be priced at $ 595.68 in 2025. This forecast is based on the stock's average growth over the past 10 years.What is the price target for Nvidia in 2025? ›
NVIDIA (NVDA) Stock Price Prediction For 2025
The 35 analysts offering 2025 price forecasts for NVIDIA have a median target of $550, with a high estimate of $610 and a low estimate of $485. The average estimate represents a 120% increase from the current price.
Despite its noteworthy liabilities, NVIDIA boasts net cash, so it's fair to say it does not have a heavy debt load! In fact NVIDIA's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months.Does NVIDIA have a lot of debt? ›
How Strong Is NVIDIA's Balance Sheet? Zooming in on the latest balance sheet data, we can see that NVIDIA had liabilities of US$6.86b due within 12 months and liabilities of US$12.3b due beyond that. On the other hand, it had cash of US$13.1b and US$4.91b worth of receivables due within a year.Does NVIDIA have debt? ›
Compare NVDA With Other Stocks.
|NVIDIA Quarterly Long Term Debt (Millions of US $)|
Is NVDA a Buy, Sell or Hold? Nvidia has a conensus rating of Strong Buy which is based on 30 buy ratings, 7 hold ratings and 1 sell ratings.Is NVIDIA a good stock to buy 2023? ›
Nvidia (NVDA -1.06%) stock's sharp rally is showing no signs of cooling off. The semiconductor bellwether has rewarded investors handsomely in 2023 with gains of nearly 89% so far, and it looks like the hype around artificial intelligence (AI) could help it sustain its terrific momentum in the stock market.What is the NVDA forecast for 3 years? ›
NVIDIA is forecasted to grow earnings and revenue by 27.2% and 19.9% per annum respectively. EPS is expected to grow by 27.3%. Return on equity is forecast to be 49.2% in 3 years.Who owns the most shares of NVIDIA? ›
NVIDIA is not owned by hedge funds. Looking at our data, we can see that the largest shareholder is The Vanguard Group, Inc. with 8.3% of shares outstanding. BlackRock, Inc. is the second largest shareholder owning 7.3% of common stock, and FMR LLC holds about 5.3% of the company stock.Is NVIDIA over or undervalued? ›
Summary. NVDA' has a weak valuation at its current share price on account of a overvalued PEG ratio despite strong growth. NVDA's PE and PEG are worse than the market average leading to a below average valuation score. Click Here to get the full Report on NVIDIA Corporation (NVDA) stock.
In a volatile Q4 2022, Buffett "bought the dip" in Apple (AAPL), picking up 333,856 more shares. AAPL stock is the No. 1 holding in Berkshire's Dow stocks-heavy portfolio by market value and the No. 2 holding by number of shares.How much will Nvidia stock be worth in 2030? ›
The average share price is expected to remain over $500 in 2025, and the NVDA price may soar to a maximum of $900 in 2030, according to market experts' projections.How big will Nvidia be in 2030? ›
According to the Traders Union long-term price forecast Nvidia (NVDA) can reach $935.19 by 2025, $4777.96 by 2030, $8218.31 by 2034.How much will NVDA cost in 2027? ›
According to the latest long-term forecast, Nvidia price will hit $350 by the end of 2023 and then $500 by the end of 2024. Nvidia will rise to $600 within the year of 2025, $800 in 2026, $1000 in 2027, $1100 in 2028, $1200 in 2029, $1300 in 2030, $1400 in 2032, $1500 in 2033 and $1600 in 2034.Is Nvidia better than AMD? ›
Nvidia: What's the difference? The most basic difference between AMD GPUs and Nvidia GPUs is that Nvidia chips tend to be more powerful, especially at the high-end, while AMD cards offer better value at lower price points and a more friendly user interface.Is Nvidia a good buy at current price? ›
NVIDIA Corporation - Buy
Valuation metrics show that NVIDIA Corporation may be overvalued. Its Value Score of F indicates it would be a bad pick for value investors. The financial health and growth prospects of NVDA, demonstrate its potential to underperform the market. It currently has a Growth Score of C.
That sky-high valuation is another reason Nvidia offers such a paltry dividend yield. The company trades at such a premium price that it must continue growing rapidly to justify its valuation. If it slows down, shares could significantly underperform from here.Why not to invest in Nvidia? ›
Weak graphics cards sales led to an alarming inventory buildup. Sales of personal computers (PCs) were down 16.5% in 2022, according to IDC, and this weighed heavily on Nvidia's gaming business during the year. The company's gaming revenue plunged 27% in fiscal 2023 to $9 billion.Is Nvidia a long term stock? ›
Nvidia provides consistent long-term growth.What are the best AI stocks to buy now? ›
|NVIDIA Corp XNAS: NVDA||Advanced Micro Devices Inc XNAS: AMD|
|Change||+$0.96 (0.34%)||−$0.56 (0.59%)|
|Market Cap||702.91 Bil||152.18 Bil|
NVIDIA Intrinsic Value - Key Valuation Metrics.
|Market Cap (mil)||699,998|
Fiscal 2020 was challenging for Nvidia, as gaming revenue fell due to a cryptocurrency mining-related hangover and excess channel inventories, but sales grew 53% in fiscal 2021 and 61% in fiscal 2022, thanks to the acquisition of Mellanox and gaming, data center, and crypto mining strength.What is NVDA highest stock price? ›
- The all-time high NVIDIA stock closing price was 333.36 on November 29, 2021.
- The NVIDIA 52-week high stock price is 292.20, which is 3.1% above the current share price.
- The NVIDIA 52-week low stock price is 108.13, which is 61.8% below the current share price.
Price at the end 306, change for May 5.88%. NVIDIA stock predictions for June 2023. The forecast for beginning of June 306. Maximum value 340, while minimum 302.What is NVDA yearly dividend? ›
High Dividend: NVDA's dividend (0.056%) is low compared to the top 25% of dividend payers in the US market (5.25%).What is the stock price forecast for NVDA in 2024? ›
On average, Wall Street analysts predict that Nvidia's share price could fall to $280.06 by May 11, 2024. The average Nvidia stock price prediction forecasts a potential downside of 1.18% from the current NVDA share price of $283.40.Where will Amazon stock be in 5 years? ›
Amazon Stock Could Be Worth $3 Trillion in 5 Years | The Motley Fool.Is Nvidia done growing? ›
However, as the world continues to invest in artificial intelligence and advanced computing applications, Nvidia is not done growing by a long shot. Management sees a $400 billion addressable market in selling chips to data centers and gaming enthusiasts.Is NVIDIA a high risk stock? ›
NVIDIA Investment Opportunity
NVIDIA has a volatility of 2.8 and is 3.11 times more volatile than NYSE Composite. 24 of all equities and portfolios are less risky than NVIDIA.
As of May 2023 NVIDIA has a market cap of $729.81 Billion. This makes NVIDIA the world's 6th most valuable company by market cap according to our data.How much long term debt does NVIDIA have? ›
NVIDIA annual net long-term debt for 2023 was $0B, a 100% decline from 2022. NVIDIA annual net long-term debt for 2022 was $4.977B, a 0.18% increase from 2021. NVIDIA annual net long-term debt for 2021 was $4.968B, a INF% increase from 2020.Is NVIDIA a low risk stock? ›
NVIDIA Investment Opportunity
NVIDIA has a volatility of 2.81 and is 3.09 times more volatile than NYSE Composite. 24 of all equities and portfolios are less risky than NVIDIA.
Currently, Ford has a total long-term debt of $140 billion, while GM is right behind with $115 billion in the same category. Tesla, on the other hand, has just $5 billion in long-term debt, and plenty of cash to show for it.What is the reputation of NVIDIA company? ›
NVIDIA has an overall rating of 4.7 out of 5, based on over 4,917 reviews left anonymously by employees. 93% of employees would recommend working at NVIDIA to a friend and 95% have a positive outlook for the business. This rating has been stable over the past 12 months. Does NVIDIA pay their employees well?What company stopped working with NVIDIA? ›
EVGA breaks up with Nvidia, will no longer make graphics cards.Will NVIDIA ever pay a dividend? ›
When is Nvidia dividend payment date? Nvidia's next quarterly payment date is on Mar 28, 2023, when Nvidia shareholders who owned NVDA shares before Mar 06, 2023 received a dividend payment of $0.04 per share. Add NVDA to your watchlist to be reminded of NVDA's next dividend payment.Who has invested in NVIDIA? ›
The top individual shareholders of Nvidia are Jen-Hsun ("Jensen") Huang, Colette M. Kress, and Mark A. Stevens, and the top institutional shareholders are Vanguard Group Inc., BlackRock Inc. (BLK), and FMR LLC.How much will Nvidia stock be worth in 5 years? ›
According to the latest long-term forecast, Nvidia price will hit $350 by the end of 2023 and then $500 by the end of 2024. Nvidia will rise to $600 within the year of 2025, $800 in 2026, $900 in 2027, $1100 in 2028, $1200 in 2029, $1300 in 2031, $1400 in 2032 and $1500 in 2034.What will NVDA stock be worth in 2030? ›
|Year||Price in the middle of the year||Price at the end of the year|
By the end of 2030, NVDA is predicted to hit $1,195, a 426% increase from today to the year's end if the forecast is realized. Nvidia has been assigned a recommendation of 'buy' by most analysts working on Wall Street.Is Nvidia a buy or sell? ›
NVDA stock has staged a strong comeback in 2023. Shares are within buy range following their latest breakout on May 1. The chip giant has raced higher this year amid investor enthusiasm about its AI leadership. Bottom line: Nvidia stock is a buy.What is the stock price forecast for Nvidia in 2024? ›
On average, Wall Street analysts predict that Nvidia's share price could fall to $280.06 by May 11, 2024. The average Nvidia stock price prediction forecasts a potential downside of 1.18% from the current NVDA share price of $283.40.How much will nvidia be in 2025? ›
According to our NVIDIA stock prediction for 2025, NVDA stock will be priced at $ 602.00 in 2025. This forecast is based on the stock's average growth over the past 10 years.Is Nvidia stock a good buy now? ›
At 155 times trailing earnings, Nvidia is richly valued. The price-to-sales ratio of 25 further tells us how expensive Nvidia stock is right now following its tremendous rally in 2023. But a forward price-to-earnings ratio of 60 highlights a huge improvement in the bottom line.Is NVDA overvalued? ›
NVDA stock has once again become grossly overvalued. The current growth rates do not support the market's optimism.How much will NVDA stock be in 2027? ›
If you have a four-year investment plan in place, you will be asking what the price of NVIDIA (NVDA) stock will be in the long term. Well, according to our data, NVDA should be priced at $723 by mid-2027. It will still gain in the last six months and be priced at $777 by year-end.Can NIO stock reach $1,000? ›
The success of NIO is dependent on the continued growth of China's electric vehicle market. If this industry continues to grow rapidly, it is possible that NIO's share price could reach $1000 per share within the next few years.