A $5 trillion company can still be cheap. At least that’s true according to analysts at UBS who say Nvidia looks undervalued according to their proprietary methodology.
Nvidia shares were up 2.3% at $218.75 in premarket trading Thursday. But the chip maker’s stock has been largely range-bound for the past three months, rising only 1.5% over that period despite blockbuster earnings.
Nvidia’s growth looks particularly good when evaluated on UBS’s HOLT, a corporate performance and valuation framework. The company is set for an 86% cash flow return on investment (CFROI)—a metric developed by HOLT to measure the relationship between a company’s generated cash flows and its invested capital, which strips out the effects of inflation and adjusts for accounting distortions, including the capitalization of research-and-development costs and off-balance-sheet operating leases.
Nvidia’s forecast CFROI is at a level only currently achieved by 30 companies globally, according to UBS analyst Helen Booth and colleagues.
“Despite this, based on consensus estimates through 2028, the current valuation implies [Nvidia’s] margins contracting by c.800 basis points and sales growth slowing to c.3% p.a. [annually] by 2029-30,” wrote Booth.
Of course the constant concern with Nvidia is that it is benefiting from a cyclical boom in artificial-intelligence chips, which must end at some point—either because AI investment will slow or the major cloud companies, known as hyperscalers, will look to cut it out of their supply chains. But the UBS team argues there’s little evidence of that so far, with economic profit across the data-center supply chain expected to surpass that of hyperscalers this year.
“Since the launch of ChatGPT, both the data centre supply chain and hyperscalers have outperformed the broader market, although the supply chain has delivered 430% relative outperformance versus 190% for hyperscalers, despite recent summer pressure,” wrote Booth.
The recent evidence is that Nvidia’s chips are still in strong demand, despite increasing competition from custom chips and other suppliers. China’s Huawei Technologies announced Thursday it will introduce a range of new AI chips in the next two years, taking advantage of restrictions on Nvidia’s ability to sell cutting-edge chips to Chinese customers.
However, cloud-computing company Nebius Group has just announced it will raise rental prices across its range of Nvidia hardware—including chips that are years old—which could relieve concerns about them losing value over time.
Nvidia was a Barron’s stock pick in May when shares traded around $226. That’s not paid off yet but there’s still time for the valuation to improve.
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