5. Valuation
By doing a simple DCF analysis, we observed that the company is currently overvalued. Some assumptions taken in this analysis include:
• WACC of 8.5%
• Revenue projection based on the assumption that NVIDIA can keep its market share amidst the growing AI industry
• Perpetuity growth of 3.0%
The analysis led us to the implied share price of US$ 287/share, which represents -32.0% of the current share price of US$ 422.1/share. Further analysis of the comparable metrics is shown below.
The data shows that NVIDIA is currently trading at a very high P/E value (26x as compared to the median of 9.8x), a sign of overvalued stock. We can therefore conclude that the overvaluation might be caused by the fact that the hype of AI and its recent announcements – while its revenue currently doesn’t justify its stock, it has a good story of the integration of AI and GPU. It can be therefore concluded that there is a SELL recommendation on NVIDIA stock.
That being said, NVIDIA is still well positioned with its advantage to capture the growth of the industry – it is just that currently the stock is trading at a very high value due to market sentiment and is overvalued. It is recommended to hold the buy for this stock, and close monitoring of the market movement is essential.
6. Catalyst
There are few catalysts that need to be tracked in investing in NVIDIA:
• Deployment of new GPU, CPU, DPU, and robotics processor: as the industry is highly driven by intellectual properties, the competition is intense on who could make the most efficient and high-speed processor. It is therefore important to observe how advanced the company compared to the competitors
• Breakthroughs in AI: gaming was once the main driver of NVIDIA, but moving forward, we would see that NVIDIA’s stock is driven even greater by the advancement of AI. One great example is the announcement of ChatGPT which took off earlier this year, which fueled the company’s stock price significantly. The rise of ChatGPT has sparked increased competition for NLP-based adoption in the industry
• NVIDIA’s bet in other business: so far, NVIDIA has placed a lot of investment in some of the still developing sectors, such as Arm-based server processors earlier this year. Although these industries often have high growth rates (e.g., the Arm-based processor is targetted to be triple in size over the next decade), it gambles highly on how effective are such investments and whether they would realize into meaningful revenue to the firm.
7. ESG
NVIDIA is committed to sustainability and has made a number of efforts to reduce its environmental impact. These efforts include:
• Purchasing renewable energy: NVIDIA has a goal of purchasing or generating enough renewable energy to match 100% of its global electricity usage by 2025. In 2022, the company purchased 1.2 gigawatts of renewable energy, which accounted for 50% of its electricity usage.
• Improving energy efficiency: NVIDIA's products are becoming more energy efficient over time. For example, the company's H100 GPUs are 26x more energy efficient than CPUs when measured across inferencing benchmarks.
• Reducing waste: NVIDIA is working to reduce the amount of waste it produces. For example, the company has a program that recycles all of its end-of-life electronics.
• Supporting sustainable communities: NVIDIA is committed to supporting sustainable communities. For example, the company has a program that provides grants to organizations that are working to address climate change.
In 2022, the company was named to the Dow Jones Sustainability Index and the Carbon Disclosure Leadership Index. In DJSI, it was even included as part of the “best green company” and “100 best companies to work for.”
8. Risks
Some risks associated with an investment to NVIDIA right now are:
• High valuation: currently, the stock is trading at a very high valuation due to the market’s bullish view of the growth of AI, and there is a huge risk of the falling price if the company could not meet the expectation of the investors. In the light of this risk, it is advisable to closely observe any announcements made by the company, as the slightest of short-term underperformance will put the stock price at stake.
• Geopolitical risks: as a NVIDIA’s supply chain is based on a global network of suppliers, it poses a huge risk in the case of major disruption, such as seen in the war between Russia and Ukraine. Moreover, the company relies much on the semiconductors from Taiwan, which in turn poses a risk depending on how the situation develops between China and USA in the future.
[1] Company’s disclosure, National Taiwan University
[2] Grand View Research
[3] USA International Trade Administration
[4] PwC’s Global Artificial Intelligence Study
[5] John Peddie Research
[6] Network World
[7] https://techmonitor.ai/technology/ai-and-automation/gpt-4-openai-multimodal-chatgpt
[8] S&P Global
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
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