Moscow, Russia – April 7, 2019: NVIDIA video chip on the motherboard, close-up
NVIDIA Corp.
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The artificial intelligence (AI) hype that is driving the company’s stock is similar to the crypto and blockchain hype that has pushed other stocks to nosebleed heights only to fall back to earth a few months after the hype died down.
Below, I’ll use my inverse discounted cash flow model to illustrate the expectations built into NVIDIA’s current stock price and quantify the risk the current valuation represents.
Stock price implies NVIDIA’s revenue will be higher than Mexico’s GDP
To justify its current price of $484/share, my model shows that Nvidia would have to:
- immediately improve the NOPAT margin to 38% (the highest ever in FY 2022),
- increase revenue by consensus in fiscal years 2024 (101%) and 2025 (47%), and
- increase revenue by 25% each year thereafter until FY 2038.
In this scenario, Nvidia’s revenue would grow 30% annually for 15 years and reach $1.45 trillion in fiscal 2038. This revenue level would be 32 times higher than the TTM ended 3Q24 and higher than the 2022 GDP of countries like Mexico, Turkey, Switzerland and Ireland. Figure 1 illustrates the magnitude of revenue growth implied in NVIDIA’s stock price.
Figure 1: Implied revenue growth in current NVIDIA stock price relative to current NVIDIA stock price. GDP of sovereign countries
Implied income NVDA DCF
For reference, this implied revenue would be 2.3 times that of Walmart.
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Figure 2: Implied NVDA revenues relative to country GDP and top revenue-generating companies
Implied income of NVDA relative to GDP and peers
The Stock Price Also Implies Ridiculous Profits (NOPAT)
Although the comparison between revenues and GDP is most appropriate, I also compare the implied net operating profit after tax (NOPAT) in this scenario to 2022 GDP levels. The above scenario implies that the NOPAT of Nvidia grows 33% annually through fiscal 2038 to $549.5 billion, or 49 times its 2Q24 NOPAT year-end TTM.
For reference, this implied NOPAT would be 5.4x that of Apple
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Additionally, a profit of $549.5 billion would make Nvidia the 25thth the largest GDP in 2022, just between Belgium and Ireland. See Figure 3. ROIC in this scenario would also be 68%, compared to 50% in TTM.
Figure 3: NOPAT implied in the NVDA compared to the country’s GDP and the companies generating the most NOPAT
NOPAT implied NVDA relative to GDP and peers
There are over 40% downsides even with massive growth
Given the optimism inherent in the stock price, I also quantify the downside risk should NVIDIA fail to meet the lofty expectations detailed above.
Instead, if I assume that Nvidia:
- maintains the NOPAT margin at 35% (equal to the TTM) and
- increases revenue by consensus in fiscal years 2024 and 2025, and
- increases its revenue by 20% each year thereafter until fiscal 2038, then
the stock would be worth just $290/share today – a 40% drop from the current price.
In this scenario, NVIDIA’s revenue would grow 26% annually over 15 years and reach $855.1 billion in fiscal 2038. This implied revenue would be 1.4 times Walmart’s TTM revenue and 73% of combined TTM revenues from Walmart and Amazon.
This scenario also implies that Nvidia’s NOPAT increases 28% annually through fiscal 2038 to $296 billion. This implied NOPAT would be 3.0x Apple’s TTM NOPAT and 85% of the combined TTM NOPAT of Apple, Microsoft, Alphabet, JPMorgan, and Exxon Mobil. This scenario also implies that NVIDIA improves its ROIC to 62% in fiscal 2038, compared to 50% in TTM.
There’s over 57% downside if margins fall to Apple’s level
Well, if I assume Nvidia:
- NOPAT margin falls to 26.1% (equal to Apple’s TTM margin and above NVDIA’s 10-year average of 24.9%) through 2038,
- increases revenue by consensus in fiscal years 2024 and 2025, and
- increases its revenue by 20% each year thereafter until fiscal 2038, then
the stock would be worth just $206/share today – a 57% drop from the current price. This scenario still implies that Nvidia generates $223 billion in NOPAT in 2038, or 2.2 times the TTM NOPAT of Apple and 90% of that of Apple, Microsoft and Google.
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Figure 4 compares NVIDIA’s implied future NOPAT in these scenarios to its historical NOPAT. For reference, I’m including Apple’s TTM NOPAT, which has the highest NOPAT in the S&P 500.
Figure 4: NVIDIA’s historical and implied NOPAT: DCF valuation scenarios
NVDA DCF Implicit NOPAT
The above scenarios assume NVIDIA grows revenue, NOPAT, and FCF, while the change in invested capital averages 11-13% of revenue in each DCF scenario. For reference, NVIDIA’s change in invested capital has averaged 20% of revenue over the past five years, 12% of revenue over the past decade, and 9% of revenue over the past 15 years. As a result, my conservative capital growth assumptions make the above scenarios even more optimistic than if future capital growth rates were closer to historical rates. Most likely, capital growth rates will be much higher to support the unusually high revenue growth rates that the stock price implies the company will achieve for so long.
Disclosure: David Trainer, Kyle Guske II, Italo Mendonça, and Hakan Salt receive no compensation for writing about any specific title, industry, style, or theme.