Is it time to buy Nvidia stock?
The share price has dropped, but is it cheap?
Since hitting an all-time high of $152.89 on 21 Nov 24, Nvidia’s share price has fallen more than 10% in just under a month.
This can be misleading when we ignore the bigger picture.
Zooming out, the company’s share price has increased by more than 170%.
Does a mere 10% decline mean the stock is cheap?
Using the stock price to determine if a company is cheap is like judging a person by his/her looks.
A stock can be cheap even if the price looks “high”, the same way a person can have good personality even if he/she looks average.
Before going into how much I think Nvidia is worth, let’s take a look at the bread and butter - how the company makes its dough.
How does Nvidia make money?
The data centre segment forms the bulk of Nvidia’s total revenue, recording at an incredible 108.39% CAGR over the last 5 years.
Nvidia generates revenue from data centers primarily through the sale of its powerful graphics processing units (GPUs).
PC and notebook original equipment manufacturers, such as Dell, HP, Toshiba, and Sony pay the company for these GPUs.
These GPUs are used to accelerate complex computations in the fields of artificial intelligence (AI) and machine learning.
Key revenue streams in the data centre market include:
GPU Sales: Nvidia's high-performance GPUs, such as the Tesla and DGX series. The need for powerful processors increases as demand for AI driven solutions grow.
Software and Services: Nvidia offers a range of software and services that complement its hardware, including AI frameworks, development tools, and cloud-based platforms.
Data Center Platforms: Nvidia also sells complete data center platforms, such as the DGX systems, which are optimised for AI workloads. These pre-configured systems simplify deployment and reduce the time and effort required for customers to get started with AI.
With over 80% of the market share in the GPU market, this makes Nvidia a key player in the data centre industry.
How much are Nvidia shares worth?
Valuing a stock is more art than science.
It’s the subjectivity involved that makes valuing a stock so challenging (and intriguing).
Due to the assumptions applied in valuing a company, what’s considered cheap for one person may be expensive for another.
The inputs for operating cash flow, total debt, and cash and cash equivalents are all objective, it’s the cash flow growth rate that’s highly subjective.
Based on my growth rate assumptions, Nvidia is worth about $169.
How do I come up with these growth rates?
There’re many different ways, but personally I like to look at their history.
Over the past decade, the company has grown their cash flow from operations at a CAGR of 53%.
As I like to be more conservative, I have used 40% for the company
A slight tweak to the growth rate can skew the numbers wildly.
Just changing the cash flow growth rate in the first 5 years from 40% to 30% will give us an intrinsic value of $119.
Choose your characters
Investing is like a game, where we choose the characters (stocks) we like.
It’s more personal than we think.
The most important thing is to invest in something we feel comfortable with, something that allows us to sleep like a baby at night.
If our investments are keeping us awake at night, we’re playing the investing game wrong.
Growth rates are based on how fast we think a company can grow.
Optimistic or pessimistic, it comes down to our risk appetite.
It’s okay to pass up on a company if it’s not undervalued by our measure.