To The Moon

Recently, $NVIDIA Corp(NVDA)$ surpassed $Apple(AAPL)$ Apple to become the world's second largest company by market capitalization. Why has Nvidia been growing so rapidly?

Bank of America analysts pointed out that Nvidia's strong leadership in the field of AI infrastructure is driven by the following factors:

1.The GB200 NVL2 platform, equipped with two Blackwell GPUs and two Grace CPUs, is perfect for mainstream large language model (LLM) inference applications and scalable configurations.

2.The MGX modular reference design now has over 90 system supports, up from just 14 last year, including upcoming AMD and Intel CPUs.

3.New AI products include Blackwell Ultra in 2025 and Rubin in 2026, along with new CPUs, SuperNICs, and switch products.

This is important information because it suggests that Nvidia's market position may remain stable for longer than many had previously anticipated.

How big is the market?

According to a study by Statista (as of May 29, 2024), the GPU market is expected to be worth approximately $274.21 billion by 2029.

How much profit can Nvidia make from this? Wall Street predicts about 89%.

It's not just about GPUs - the expansion of the product range indicates that Nvidia's total addressable market (TAM) will grow even faster. During the February earnings call, management predicted that generative AI will drive a "doubling of the global data center infrastructure install base," potentially bringing in hundreds of billions of dollars in sales each year.

Analyst Decoder Ring calculated that in this scenario, the TAM for the company's data center semiconductors will grow from $250 billion this year to $500 billion in five years, with $250 billion coming mainly from AI, representing significant market growth. Nvidia′ sappetite seems to be growing, and thec ompany expects a long term TAM of about $1 trillion, which seems unachievable today.

Based on relevant data, Wall Street expects Nvidia's revenue to grow at a compound annual growth rate of 12.25%. Although Nvidia operates in a cyclical industry with changing market conditions, let's assume the current cycle is very long and sustained - this would allow the company to consistently achieve higher EBIT margins.

The yield on Nvidia's current bonds is about 4.7% - that's the company's cost of debt today. Assuming an effective tax rate of 15%, a risk-free rate of 4% (deliberately lower than the current 10-year Treasury yield of 4.3%), and a market return premium (MRP) of 5%, we get a WACC of 12.7%, which seems reasonable considering the Fed's still strict policy.

As for EV/FCF, the current multiple of 76 times seems too high - considering that growth rates will inevitably decline by fiscal 2028, as suggested by sales growth assumptions, we believe EV/FCF should be in the range of 35-40 times, close to the 10-year median.

All these assumptions lead to the following conclusion:

$NVIDIA Corp(NVDA)$ 's valuation is overestimated by 8-25%, even if we assume that Wall Street analysts have made a mistake again and their predictions have once again underestimated the company's true growth potential. But if we assume a stable EBIT margin of 75% instead of 65% (which can be considered an absolute outlier), and the company's FCF grows by 10% instead of 9%, then according to the DCF model, Nvidia's stock is undervalued by about 16%:

Without changing this scenario, but assuming an EV/FCF of approximately 50 times by the end of 2028, the upside potential will be higher. Nvidia may still be cheap at the moment.

Therefore, Bank of America analysts have concluded that $NVIDIA Corp(NVDA)$ is undervalued by 22.5% (with a target price of $1,500), which makes sense if you agree with their views.

Analysts at Argus Research are even more optimistic, believing that the "fair" price of Nvidia stock is 83.7% higher than today's price, at $2,800, which is much higher than the current price and showin garapid upwardtrend. If they are right, then $NVIDIA Corp(NVDA)$ will have to add another $1 to $2 trillion to its market capitalization today.

From a fundamental perspective, Nvidia is approaching its local peak. Looking ahead, it will certainly be difficult to satisfy investors, as even if earnings continue to outperform the market, fair valuation will still be higher than normal, as shown by the DCF model. I can't see any margin of safety.