Estimating The Intrinsic Value Of NVIDIA Corporation (NASDAQ:NVDA)
Key Insights
Using the 2 Stage Free Cash Flow to Equity, NVIDIA fair value estimate is US$95.76
With US$103 share price, NVIDIA appears to be trading close to its estimated fair value
Analyst price target for NVDA is US$149, which is 55% above our fair value estimate
Does the September share price for NVIDIA Corporation (NASDAQ:NVDA) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by taking the forecast future cash flows of the company and discounting them back to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you’d imagine.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for NVIDIA
Step By Step Through The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$60.1b
US$82.5b
US$102.7b
US$119.1b
US$131.4b
US$141.8b
US$150.8b
US$158.6b
US$165.5b
US$171.9b
Growth Rate Estimate Source
Analyst x15
Analyst x15
Analyst x9
Analyst x2
Est @ 10.30%
Est @ 7.96%
Est @ 6.32%
Est @ 5.18%
Est @ 4.37%
Est @ 3.81%
Present Value ($, Millions) Discounted @ 7.9%
US$55.8k
US$70.9k
US$81.8k
US$87.9k
US$89.9k
US$90.0k
US$88.7k
US$86.5k
US$83.6k
US$80.5k
(“Est” = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$815b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 7.9%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$172b× (1 + 2.5%) ÷ (7.9%– 2.5%) = US$3.3t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.3t÷ ( 1 + 7.9%)10= US$1.5t
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.3t. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$103, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
dcf
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at NVIDIA as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 7.9%, which is based on a levered beta of 1.306. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for NVIDIA
Strength
Weakness
Opportunity
Threat
Next Steps:
Although the valuation of a company is important, it ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you’d apply different cases and assumptions and see how they would impact the company’s valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For NVIDIA, we’ve compiled three important elements you should look at:
Risks: Be aware that NVIDIA is showing 2 warning signs in our investment analysis , and 1 of those doesn’t sit too well with us…
Future Earnings: How does NVDA’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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