NVIDIA Corp (NVDA, Financial) recently experienced a daily gain of 4.62% and a 3-month gain of 36.7%. The company's Earnings Per Share (EPS) stands at 1.92. However, the question arises: is the stock significantly overvalued? In this article, we will delve into the valuation analysis of NVIDIA, providing a comprehensive examination of its financial health, profitability, and growth.
Company Overview
NVIDIA Corp (NVDA, Financial) is a leading designer of discrete graphics processing units that enhance the experience on computing platforms. The firm's chips are used in various end markets, including PC gaming and data centers. In recent years, NVIDIA has broadened its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence and autonomous driving. This shift leverages the high-performance capabilities of the firm's products.
With a current share price of $453, NVIDIA boasts a market cap of $1.10 trillion. However, its GF Value, an estimation of fair value, stands at $312.97, indicating that the stock might be significantly overvalued. Let's delve deeper into this valuation.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. 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 our summary page gives an overview of the fair value that the stock should be traded at.
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. According to our analysis, NVIDIA (NVDA, Financial) is believed to be significantly overvalued.
Given that NVIDIA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company.
NVIDIA has a cash-to-debt ratio of 1.27, which is worse than 58.84% of 865 companies in the Semiconductors industry. However, GuruFocus ranks the overall financial strength of NVIDIA at 8 out of 10, which indicates that the financial strength of NVIDIA is strong.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. A company with high profit margins is usually a safer investment than those with low profit margins. NVIDIA has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $25.90 billion and Earnings Per Share (EPS) of $1.92. Its operating margin is 17.37%, which ranks better than 75.75% of 936 companies in the Semiconductors industry. Overall, the profitability of NVIDIA is ranked 10 out of 10, which indicates strong profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. NVIDIA's 3-year average revenue growth rate is better than 87.86% of 865 companies in the Semiconductors industry. However, NVIDIA's 3-year average EBITDA growth rate is 20.1%, which ranks worse than 52.99% of 768 companies in the Semiconductors industry.
ROIC vs WACC
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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, NVIDIA's return on invested capital is 20.32, and its cost of capital is 16.75.
Conclusion
In summary, the stock of NVIDIA Corp (NVDA, Financial) is believed to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks worse than 52.99% of 768 companies in the Semiconductors industry. To learn more about NVIDIA stock, you can check out its 30-Year Financials here.
To find out the high quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
