- By GF Value
The stock of NVIDIA (NAS:NVDA, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $552.47 per share and the market cap of $342.5 billion, NVIDIA stock appears to be significantly overvalued. GF Value for NVIDIA is shown in the chart below.
Because NVIDIA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 20% over the past three years and is estimated to grow 19.57% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. NVIDIA has a cash-to-debt ratio of 1.50, which is in the middle range of the companies in Semiconductors industry. The overall financial strength of NVIDIA is 7 out of 10, which indicates that the financial strength of NVIDIA is fair. This is the debt and cash of NVIDIA over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. NVIDIA has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $16.7 billion and earnings of $6.89 a share. Its operating margin is 27.18%, which ranks better than 92% of the companies in Semiconductors industry. Overall, the profitability of NVIDIA is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of NVIDIA over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. NVIDIA's 3-year average revenue growth rate is better than 85% of the companies in Semiconductors industry. NVIDIA's 3-year average EBITDA growth rate is 18.3%, which ranks in the middle range of the companies in Semiconductors industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, NVIDIA's return on invested capital is 43.09, and its cost of capital is 9.43. The historical ROIC vs WACC comparison of NVIDIA is shown below:
Overall, the stock of NVIDIA (NAS:NVDA, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about NVIDIA stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
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NVIDIA Stock Shows Every Sign Of Being Significantly Overvalued - Yahoo Finance
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