Weekly Stock Valuation: NVIDIA Corporation (NVDA)
Valuation of NVIDIA Corporation (NVDA) Using Discounted Cash Flow (DCF) Methodology
Data Cutoff: The latest financial data available is up to October 12, 2024.
1. Executive Summary
This valuation aims to estimate the intrinsic value of NVIDIA Corporation (NVDA) by projecting free cash flows (FCF) over the next 15 years with varying growth rates, followed by a terminal value calculated using the perpetual growth method. The valuation incorporates an in-depth analysis of market trends, market size growth, market share changes, and NVIDIA's competitive moat.
2. Company Overview
NVIDIA is a leading technology company specializing in the design and manufacturing of graphics processing units (GPUs) for gaming, professional visualization, data centers, and automotive markets. Its advancements in artificial intelligence (AI), machine learning, and high-performance computing have positioned it as a key player in several rapidly expanding industries.
3. Industry Analysis and Market Trends
3.1 Market Size and Growth
Data Center Market: Expected to grow at a CAGR of ~10% over the next decade, driven by cloud computing, AI, big data analytics, and IoT proliferation.
Artificial Intelligence Market: Projected to grow at a CAGR of ~35%, with increasing adoption across sectors like healthcare, finance, and automotive.
Gaming Market: Anticipated to grow at a CAGR of ~9%, driven by the rise of mobile gaming, esports, and virtual reality technologies.
Automotive AI Market: Expected to grow at a CAGR of ~30%, driven by advancements in autonomous driving and intelligent infotainment systems.
3.2 NVIDIA’s Market Position
Discrete GPU Market: NVIDIA holds over 80% of the market share.
Data Center GPUs: NVIDIA has a dominant position due to its CUDA platform and ecosystem.
Competitive Moat:
Technological Leadership: Continuous innovation in GPU architectures (e.g., Ampere, Hopper).
Software Ecosystem: The CUDA platform creates high switching costs for developers.
Strategic Partnerships: Collaborations with leading tech companies and cloud service providers.
R&D Investment: Significant investment in research (~25% of revenue) fosters innovation.
Barriers to Entry: High capital requirements, advanced technological expertise, and established customer relationships.
4. Historical Financial Performance (Up to FY2024)
4.1 Revenue Growth
FY2019: $11.72 billion
FY2020: $10.92 billion (-6.8% YoY)
FY2021: $16.68 billion (+52.8% YoY)
FY2022: $26.91 billion (+61.4% YoY)
FY2023: $26.97 billion (+0.2% YoY)
FY2024 (up to October 2024): $35.41 billion, reflecting an uptick in data center and AI demand.
4.2 Profitability
Gross Margin FY2024: ~66%
Operating Margin FY2024: ~38%
Net Income FY2024: $12.75 billion
Net Margin FY2024: ~36%
4.3 Free Cash Flow
FCF FY2024: $9.78 billion
5. Projection Assumptions
5.1 Revenue Projections
Considering the growth prospects in NVIDIA's key markets:
5.2 EBITDA Margin
EBITDA Margin: Stabilizing around 38% due to economies of scale and operational efficiencies.
5.3 Capital Expenditures and Depreciation
CapEx: 6% of revenue annually, supporting R&D and infrastructure.
Depreciation & Amortization: 4% of revenue annually.
5.4 Working Capital
Net Working Capital: Maintained at 12% of revenue.
5.5 Tax Rate
Effective Tax Rate: 15%, considering R&D tax credits.
5.6 Discount Rate
Weighted Average Cost of Capital (WACC): 9%
Cost of Equity: 10.5%
Risk-Free Rate: 3%
Beta: 1.5
Market Risk Premium: 5%
Cost of Debt: 4% (after-tax)
Capital Structure: 95% Equity, 5% Debt
5.7 Terminal Growth Rate
Perpetual Growth Rate: 3%, reflecting long-term GDP growth.
6. Free Cash Flow Projections (FY2024 - FY2028)
7. Summary Projections (FY2029 - FY2038)
For brevity, FCFs for years 6 to 15 are summarized below:
8. Terminal Value Calculation
Terminal Year FCF (2038): $35.19 billion
Terminal Value: Terminal Value=35.19×(1+0.03)0.09−0.03=$603.44 billion\text{Terminal Value} = \frac{35.19 \times (1 + 0.03)}{0.09 - 0.03} = \$603.44 \text{ billion}Terminal Value=0.09−0.0335.19×(1+0.03)=$603.44 billion
9. Present Value Calculations
9.1 Present Value of FCFs (FY2024 - FY2038)
Total PV of FCFs: $180.07 billion
9.2 Present Value of Terminal Value
PV of Terminal Value: 603.44×0.2809=$169.55 billion603.44 \times 0.2809 = \$169.55 \text{ billion}603.44×0.2809=$169.55 billion
10. Enterprise Value Calculation
Enterprise Value = $180.07 billion + $169.55 billion = $349.62 billion
11. Equity Value and Intrinsic Share Price
Net Cash: NVIDIA has a net cash position of $5 billion.
Equity Value = $349.62 billion + $5 billion = $354.62 billion
Shares Outstanding: Approximately 2.5 billion shares.
Intrinsic Value Per Share = $354.62 billion ÷ 2.5 billion = $141.85 per share
12. Sensitivity Analysis
13. Conclusion
Based on the DCF analysis, NVIDIA's intrinsic value per share is estimated at $141.85. This reflects NVIDIA's strong market position, significant growth prospects in AI, and robust competitive moat.
14. Risk Factors and Considerations
Technological Disruption: Rapid advancements could reduce NVIDIA's competitive advantage.
Competitive Pressure: Competition from AMD, Intel, and emerging AI chip startups.
Supply Chain Constraints: Dependence on third-party manufacturers like TSMC introduces risks.
Regulatory Challenges: Geopolitical tensions and export controls could impact operations.