NVIDIA is set to beat the market again

  |  by Alexander Chepakovich   |  Primary ticker: NVDA

Despite a spectacular run last year, when the share price increased close to four-fold, the company’s stock has potential for farther three-fold increase.

Take a look at the NVIDIA Corporation (NVDA) stock chart.

It is a dream of every investor, who invested early enough, that is. What about those who stayed on the sidelines waiting for the stock price to drop to buy it? Does it make sense to buy the stock now when it is close to its dizzying heights or is it more prudent to continue to wait?

Well, the market is unpredictable and I am not even trying to guess where it goes from here. I am a long-term value investor and always look at the underlying value of the companies I buy – on the belief that undervalued companies with solid business prospects will outperform overvalued ones in any market, eventually.

So, is NVIDIA Corporation’s stock a good investment at the current price? I think it is. Let’s look at the fundamentals.

NVIDIA is one of the leading suppliers of integrated solutions in the extremely hot Graphics Processing Unit (GPU) and revolutionary Artificial Intelligence (AI) fields. Of course, these markets are intensely competitive and the company goes head to head to some of the best-known names in the industry: Advanced Micro Devices, ARM Holdings, Imagination Technologies Group, Intel, Xilinx, Ambarella, Apple, Broadcom, Mobileye, Qualcomm, Renesas Electronics Corporation, Samsung, and Texas Instruments Incorporated.

The speed of technological change is breathtaking and each of these firms has great potential. It is virtually impossible to determine who will win and who will lose in this completion. I have a feeling, though, that NVIDIA will be in the winning pack. It has a focus and track record of bringing new highly-successful innovative products to the market.

From the valuation point of view, NVIDIA Corporation’s stock, in my opinion, offers the best value, too. X-FIN valuation model (even with some conservative adjustments to the mechanical reading of financial statements) shows the stock’s intrinsic value is around $300, which suggests almost 200% upside potential.

About the valuation model adjustments. There are just two of them of significance:

  1. I’ve changed the very high quarterly revenue growth rate (year-over-year) of 50% that is used as a proxy for this year’s projected revenue growth rate to a more conservative yearly revenue growth rate of 30% (in the fiscal year ended on January 29, 2017, it was 38%).
  2. I’ve estimated that actual stock-based compensation expense in the last fiscal year was around $818 million, compared to $247 million reflected in the company’s income statement. Therefore, I’ve made cash flow adjustment of -8.3% of revenue in the valuation model inputs.

Despite this, I would be a buyer of NVDA at the current price. Notwithstanding, I am afraid unavoidable volatility, I think the stock has all the potential to outperform the market by a wide margin this year too.

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