Nvidia Stock Valuation: A Conservative Look at Fair Price (2024)
Before You Invest, Understand Nvidia's Potential Upside (or Downside)
Nvidia (NVDA) made the headlines with its dominance in GPUs and its momentum in the booming AI space; not to mention the tremendous performance of Nvidia Stocks and its earnings with expressive growth. The question on everyone's mind: is the current stock price a fair reflection of its future potential?
Today, we'll bypass the market's optimism and explore a conservative valuation model. This approach helps us assess Nvidia's true value and potential margin of safety.
A “Conservative” Take on Nvidia's Valuation
While the market often leans optimistic, I've built a model using more conservative projections for Nvidia's future to find its fair price. Here's the breakdown:
Net Sales: While analysts predict $160 billion by 2026, my model suggests a more cautious $143.6 billion. It's still a very robust level and the projections consider a still favorable pace of growth.
EBITDA: Market consensus is $106 billion, but my model considers a more conservative $92 billion in the same period. You can check out the rest of the assumptions in the image below.
Terminal Growth: Projected at a steady 4%, reflecting the long-term potential of the market and inflation.
WACC: Calculated at 10.3%, considering interest rates (10-year Treasury) and risk premium.
Source: Author and Koyfin
So, What's the Fair Price?
Based on this conservative model, I estimate Nvidia's stock fair price to be around $722, representing a potential downside of nearly 14% from the current market price.
Remember, this is just one approach!
This model serves as a thought experiment, not a prediction. By making different assumptions, you can arrive at different fair values. More bullish perspectives could even suggest some upside potential: If Nvidia somehow succeeds in managing even higher growth than the market estimates, we could easily see the stock trading above that level. Check out our last article on how the company could reach $3 trillion in market cap.
My Takeaway:
Nvidia stock is not in a bubble; its high multiples are based on its (concrete) growth expectations and its premium business model. Even with all these moats, at the current level, I don't see Nvidia as an asymmetric stock, it seems to me to be very close to the fair price, and even see a downside in some more pessimistic scenarios. In other words, there seems to be a narrow margin of safety, given that the current market is pricing in a very optimistic, albeit plausible, scenario.
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