Nvidia Stock Deep Dive Analysis: NVDA price target at $205 with strong revenue growth

Nvidia was one of the top-performing stocks in 2021, but the picture has changed in 2022 with the stock falling by nearly 40% year to date. This has been largely due to the shift from growth to value stocks as well as the changing macroeconomic picture. A series of rate hikes from central banks on both sides of the Atlantic have been aggressively priced in by equity markets. Inflation and supply chain issues have also caused a rotational shift from growth to value and from tech to defensive stocks. We surmise that this reduction in Nvidia's stock price presents a more sustainable entry point with risks of a valuation re-rating offset by continued strong revenue growth. We will outline our DCF model with revenue assumptions leading to a fair value share price for Nvidia as well as comparative models versus its peer group and index members.

Contents

Nvidia: Company overview

Key valuation rating metrics

Peer value comparison

Macroeconomic backdrop, market cycle and sector analysis

Nvidia: Company overview

Nvidia is part of the global semiconductor industry with operations spanning graphics cards and gaming, automotive applications and data centers. Nvidia was founded in 1993 by three US computer scientists: Jen Hsun Huang, Curtis Priem and Christopher Malachowsky. The initial focus of the company was on the gaming industry with the production of high-end graphics processing units (GPU), which helped power the explosion in gaming culture that took off in the 1990s.

Also read: Apple Stock Deep Dive: AAPL price target at $100 on falling 2023 revenues

The GeForce was the company's first blockbuster gaming card and elevated the company to global prominence. The success of this led to Microsoft selecting Nvidia for its Xbox console. Currently, Nvidia operates across gaming, streaming via GeForce NOW, automotive applications for onboard display and infotainment units, and also provides units for cloud-based applications. The company splits its revenue according to automotive, datacentre applications, gaming and intellectual property, and professional visualizations. Nvidia has invested heavily in the omniverse with 3D virtual worlds and sees this as a key component of its future strategy.

Nvidia has been deriving a significant share of its revenue from Asia. This has been largely due to the growth of manufacturing hubs in Asia as well as the growing Chinese middle class.

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	2022	2021	2020	2019	2018
	30-Jan-2022	31-Jan-2021	26-Jan-2020	27-Jan-2019	28-Jan-2018
China	26%	23%	25%	24%	20%
Taiwan	32%	27%	28%	29%	31%
Other Asia Pacific	—	19%	25%	20%	21%
Europe	—	6.7%	9.1%	7.8%	7.9%
United States	16%	19%	8.1%	13%	13%
ROW	26%	5%	5.0%	6%	7%
Total	100%	100%	100.2%	100%	100%

Source: Refinitiv and FXStreet

Nvidia's revenue by product line, below, shows the dominance of the original gaming sector. However, data center revenue has increased markedly and now rivals gaming. These are the current two main drivers of revenue and will continue to be so over the next three to five years in our view. The omniverse potential remains much harder to quantify, but it retains the chance of being a super catalyst. Recent earnings for cloud peers such as Microsoft and even Amazon via its AWS unit have shown continued strength in the cloud sector. In its last earnings report, Nvidia showed remarkable revenue growth across the data center sphere, running at over an 80% growth rate on a yearly basis. We estimate this makes it likely to be the biggest revenue driver over the next three to five years.

			HISTORICAL (ACTUALS)	FORECAST (MEAN)
	FY Jan-20	FY Jan-21	FY Jan-22	FY Jan-23	FY Jan-24	FY Jan-25
INCOME STATEMENT
REVENUE	10,918	16,675	26,914	33,721	39,356	45,529
Guidance	T	T	T	T	–	–
AUTOMOTIVE	700	536	566	690	998	1,163
DATACENTER	2,983	6,696	10,613	16,918	21,448	24,568
GAMING	5,518	7,759	12,462	13,193	13,842	15,090
OEM AND IP	505	631	1,162	673	654	727
PROFESSIONAL VISUALIZATION	1,212	1,053	2,111	2,616	2,916	3,314

Source: Refinitiv & FXStreet

Nvidia Wall Street consensus forecast

	Analysts Per level
	09-Mar-2022	09-Apr-2022	09-May-2022	Current
1 – StrongBuy	11	11	11	12
2 – Buy	29	28	28	29
3 – Hold	7	8	9	8
4 – Sell	1	–	–	–
5 – StrongSell	–	–	–	–
Rec Mean	2	1.9	2	1.9

Price Target Summary
Price Target	Target
	09-Mar-2022	09-Apr-2022	09-May-2022	Current
Median	$350.00	$350.00	$350.00	$250.00
Mean	$341.17	$343.03	$326.46	$264.52

Source: Refinitiv

The Wall Street analyst community remains almost uniformly bullish on Nvidia with only one sell rating and an average price target of $250. At current prices, this gives it a near 40% upside.

Nvidia key valuation metrics

Market cap $	451 billion
Enterprise Value	462 billion
EV/EBITDA	35
Free Float	2.4 billion
IPO date	22-Jan-99
52-week high	346.47
52-week low	155.67
Short interest	1.30%
YTD performance	-39%
3-Year performance	430%

Source: Refinitic, TradingView, FXStreet

Nvidia peer value comparison

Nvidia was a pandemic darling stock favored by both retail and institutional a like. This has made for some concerning valuation multiples. The price/earnings ratio at 50 is ringing alarm bells, especially compared to Intel's P/E at 7. Even against other more direct peers, NVIDIA does look richly priced. AMD, for example, at a P/E of 38 is still comfortably behind. However, Nvidia boasts the highest margins in the semiconductor space, and revenue is growing exponentially at near 80% annually. The high relative multiple though is one of the key risks going forward, but with revenue growth and margins high NVIDIA should see its P/E reduce without impacting heavily on the share price performance. Indeed, with forward EPS guidance, the P/E for the next twelve months is trading at a more acceptable 31.

	Market Cap	Gross margin	FCF	P/E	EV/EBITDA	P/book	P/Sales	EPS growth rate	ROE
NVIDIA	$451 billion	65%	$8 billion	50	34	18	18	22%	45%
Broadcomm	$225 billion	58%	$14 billion	28	15	9	9	38%	28%
Qualcomm	$153 billion	59%	$7 billion	14	11	15	5	50%	113%
Intel	$163 billion	54%	$10 billion	7	5	2	2	-45%	23%
AMD	$160 billion	47%	$3 billion	38	32	16	8	47%	47%
Samsung	$362 billion	40%	$13 billion	10	4	1.5	1.5	24%	15%
S&P 500				20
Nasdaq				25

Source: TradingView, Refinitiv and FXStreet

Macroeconomic backdrop, market cycle and sector analysis

The global macroeconomic backdrop continues to look challenging. Supply chain issues remain unresolved, inflation remains elevated, and central banks have begun aggressive monetary tightening. The European Central Bank this week announced rate hikes for the remainder of the year. The Fed is already well down that path with another 50 basis point hike imminent, and the Bank of England has been alarmist about the threat of recession. We write in advance of June's US CPI release. While it may show signs of inflation slowing, the speed of the decline is unlikely to provide much comfort.

Also read: Tesla Stock Deep Dive: Price target at $400 on China headwinds, margin compression, lower deliveries

Naturally, all this has meant equities remain in a challenging environment, and most indices are in bear market territory (defined as a peak to trough decline of 20% or more). The S&P 500 remains in a corrective phase, while the Nasdaq is in a bear market.

Bear markets on average have losses of nearly 40% from peak valuations and an average time span of 300 days. This bear market should have more time to run then – another 20% approximately if it is to meet the historical average. The key question is whether or not the US economy will go into recession in 2023. Bear markets without accompanying recessions are notably less severe with average peak-to-trough declines of 25%.

There is conflicting evidence from headline economic indicators as to the next stage in economic growth. Many forecasters are predicting the US and global recession in the first half of 2023. For now, US data is holding up relatively well. Employment markets remain tight, and workers are exercising their power to negotiate pay raises or are switching jobs. This helps underpin spending, which is a key driver of economic growth. The flip side is that this makes inflation more entrenched. We have also seen some recent upticks in credit card spending, and the personal savings rate has dropped to a decade low. Consumers are using pandemic savings to fuel consumption as well as credit, but as of yet the levels are not concerning.

The pace of change is a factor, and one can say with certainty that US and global economies are slowing. What is less clear is the recession forecast.

Semiconductor sector

The pandemic witnessed a perfect storm of sorts for the chip industry. Stay-at-home demand for work laptops, gaming stations and other PC equipment led to soaring chip demand and resultant shortages. As these bottlenecks unwound, we had continued demand from the aforementioned savings rates and pent-up demand. Semiconductor stocks were some of the best performing names of 2021 as a result. Demand has since flatlined, but supply chain issues have resurfaced meaning chip companies should be able to maintain and increase margins. The majority of chip makers stockpiled in a reactive move to the strong demand witnessed during the pandemic. While this demand may be flatlining, chip makers have inventory available at significantly lower input costs than the current surging inflationary selling costs.

Chip companies face yet another perfect storm, but this time on the supply side of the equation. Russia's invasion of Ukraine has created a shortage of neon gas, which is critical in the production of semiconductor chips. Ukrainian steel plants under Russia's control produce half the world's supply of neon gas. This problem combined with further lockdowns imposed during the month of May in China has led to yet more shortages and fears over chip supply. This has become especially notable in the auto space. Reports have been circulating of auto manufacturers paying double or treble for chips in order to complete a $50,000 vehicle. The reason is scale. A laptop costing $500 requires the same $50 chip that a car costing $50,000 requires to complete its infotainment system or other features. Car companies are then hugely incentivized to outbid other customers for those chips. We expect chip shortages to yet again become an issue but would favor those with higher exposure to the auto sector: Nvidia is not a major supplier to auto companies.

Nvidia latest news and earnings

The latest data from the World Semiconductor Trade Statistics (WSTS) expects the sector to grow 16% in 2022 and a more modest 5% in 2023. Intel (INTC) spoke this week at an investor conference and appeard to talk down projections for the coming quarter, citing multiple headwinds from China to inventory levels.

Despite this downbeat analysis from Intel, NVDA reported earnings on May 25 that showed continued growth in revenue with a beat on EPS and revenue versus Wall Street estimates. Earnings per share (EPS) came in at $1.36 which beat estimates by $0.06 and was nearly 50% higher than previous while revenue growth was also nearing 50% yearly. However, the company sounded a more cautious approach on its outlook given headwinds from China and Russia. Nvidia scaled-back revenue and margins to slightly below Wall Street estimates but despite this NVDA stock did perform strongly post the results.

The reasoning can be seen in the mix of revenue and strong sectoral performance across gaming and data center. Gaming revenues were up 30% yearly while data center revenues rose 83% yearly. NVDA has also taken steps in its adoption of the omniverse as it expects monetization of this space to accelerate in 2023.

Nvidia valuation analysis and fair value

We run a standard DCF and EBITDA valuation model.

	NVIDIA free cash flows
	2020	2021	2022	2023	2024	2025

EBITDA	4,116	7,901	13,864	17,405	20,635	26,000
EBIT	3,735	6,803	12,690	16,019	19,144	21,689
Tax rate	7%	6%	2%	12%	13%	13%

EBIT (1-t)	3,818	7,421	13,600	15,269	18,032	22,655
D&A	381	1,098	1,174	1,302	1,304	3,138
Change in NWC	-178	623	-12,364	-6,354	-11,960	-15,308
Capital expenditures	489	1,128	976	1,534	1,626	1,718
Unlevered free cash flows (UFCF)	4,510	10,270	3,386	11,751	9,001	12,202
Free cash flow forecasts	4,272	4,694	8,132	14,000	16,000	18,000
Discount rate (r)		10%	10%	10%	10%	10%
PV of UFCFs		9,243	3,048	10,576	8,101	10,982
PV of FCF		4,225	7,319	12,600	14,400	16,200
Stage 1: Sum of present values		41,949
Sum of PV using FCF		54,743

Growth in perpuatiy valuation		Using Forecast FCF
growth rate	10		10	10
2025 FCF	13,178		19,440	17,162
termival value in 2025	658,911		972,000	858,075
Present Value of Terminal Value	371,938		548,669	484,361

Enterprise value	413,887		603,412	534,812

current net debt	– 10,262		– 10,262	– 10,262

shares outstanding	2,535		2,535	2,535

equity value	$167		$242	$215
EBITDA Multiple approach
ebitda multiple	35		25
terminal value in 2025	910,000		650,000
PV of term value	513,671		366,908

ent value	555,621		421,651
net debt	62,928		62,928
shares outstanding	2,535		2,535
equity value	$194		$142

Source: Refinitiv and FXStreet calculations

Running the numbers gives us various options to consider. Our main forecast model uses a 10% increase in revenues for 2023 over company forecasts and a resultant increase in margins. This leads us to a DCF price of $242, some $60 above the current NVDA stock price. However, our concern surrounds the high valuation currently placed on the shares. As mentioned NVDA trades on a P/E of 50, too high in our view to be sustainable.

Using the current EV/EBITDA multiple of 35 gives us a fair value of $194, but taking this EV/EBITDA ratio back to 25 gives a lowered price target of $156. This is more in line with sector peers and Nasdaq averages. As we can see below the 10-year average for EV/EBITDA is 28.51 for Nvidia. That would imply a fair value of $162.

It though will likely take some time for Nvidia to rerate to the sector average of 25 but it may settle at 30, giving us a fair price of $172. Combining this with our revenue forecasts gives us our average price target of $207. This obviously represents a premium to the current NVDA stock price and necessitates a BUY rating as a result.

Using the more standardized EPS approach and inputting our updated forecasts gives us EPS guidance of $6.22 for 2023. Trading at 50 times trailing P/E gives a price target of $300 but given we are uncomfortable with such a high P/E this updated EPS still results in a price target of $205 if the P/E falls to 32. The risk as can be seen below is if NVDA falls to the lower end of its historical P/E near 20.

Source: Refinitiv

Based on all the above we run with a 12-month price target of $205 and a BUY rating.

Nvidia technical analysis

How does this fit into the technical viewpoint? There is comforting support at $130 from the huge volume profile and consolidation zone that lasted from August 2020 until April 2021. This breakout was the pandemic-fueled demand combined with chip shortages. As we have highlighted shortages look set to continue. The recent earnings report has seen NVDA stock bottom and $205 looks modest but it is technical resistance at February to April lows.

Nvidia price target and recommendation

The technical picture above gives us some comfort in the event that the downdraft and bear market continues. As detailed above with supply shortages and demand growth remaining strong, NVDA is in a strong position. We believe it has the inventory to cope with current supply issues and demand from the cloud sector will continue as remote working becomes embedded. This creates a permanent uptick in demand for home office, laptop and PC's as well as resultant gaming demand due to more leisure time. This is an immediate event and is not a 5-10 year thesis. The omniverse by comparison is a longer-term thesis and one we largely discounted from any calculation. So there is a form of free bet from the omniverse potential.

Upside risks to our price target

Supply chain issues accelerate meaning increased price pressure and demand at any price from auto and tech companies.
Inflation reduces quickly.
Chinese demand is buoyed from loose monetary policy.
Omniverse acceleration and monetization.
Downside risks to our price target
The bear market continues with high valuation P/E stocks continued selling.
PC and laptop demand drop sharply as a result of recession and unemployment. The employment market is strong in US but Europe has headwinds.
Production grinds to a halt due to the neon gas shortage.

Nvidia reported earnings and forecast tables below, the foundation for all our DCF models. Data taken from Refinitiv (Reuters).

			HISTORICAL (ACTUALS)	FORECAST (MEAN)
	FY Jan-20	FY Jan-21	FY Jan-22	FY Jan-23	FY Jan-24	FY Jan-25
INCOME STATEMENT
REVENUE	10918.000	16675.000	26914.000	33720.708	39355.898	45528.698
Guidance	T	T	T	T	–	–
AUTOMOTIVE	700.000	536.000	566.000	690.436	997.627	1163.450
DATACENTER	2983.000	6696.000	10613.000	16918.150	21447.925	24567.600
GAMING	5518.000	7759.000	12462.000	13193.075	13841.800	15089.700
OEM AND IP	505.000	631.000	1162.000	673.382	654.127	726.700
PROFESSIONAL VISUALIZATION	1212.000	1053.000	2111.000	2615.527	2915.836	3314.200

COST OF GOODS SOLD	4097.000	5728.000	8945.000	11063.923	12806.426	14547.100
GROSS INCOME	6821.000	10947.000	17969.000	22750.100	26794.211	30748.717
GROSS PROFIT MARGIN	62.500%	65.600%	66.760%	67.026%	67.690%	65.778%
Guidance	T	T	T	–	–	–

SELLING & MARKETING EXPENSE	–	–	–	2847.000	3627.000	4439.000
SG&A EXPENSE	828.000	1089.000	1893.000	1680.300	1940.083	2106.250
GENERAL & ADMIN EXPENSE	–	–	2166.000	2895.000	3525.000	3950.000
R&D EXPENSE	2289.000	3055.000	5249.000	5488.312	6316.627	7842.333
STOCK BASED COMPENSATION	844.000	1397.000	2004.000	2150.500	2236.700	2347.500
OPERATING EXPENSE	3086.000	4144.000	5279.000	6962.893	7957.456	9503.100
Guidance	3,024:3,080	4,100	5,139:5,221	–	–	–

EBITDA	4116.000	7901.000	13864.000	17404.544	20635.190	23089.071
EBITDA PER SHARE	1.665	3.145	5.469	5.580	6.403	5.380
DEPRECIATION	355.000	486.000	611.000	1141.400	1206.800	1526.000
EBITA	2728.000	4532.000	10041.000	10741.000	11344.000	12020.000
AMORTIZATION	25.000	612.000	563.000	356.333	410.000	1391.000
DEPRECIATION & AMORTIZATION	381.000	1098.000	1174.000	1302.000	1303.733	3137.500

EBIT	3735.000	6803.000	12690.000	16019.194	19143.624	21689.011
OPERATING PROFIT	–	4532.000	–	12086.317	11548.200	–
INTEREST EXPENSE	52.000	184.000	236.000	229.765	223.688	246.333

PRE-TAX PROFIT	3860.000	6683.000	12494.000	15062.152	18292.946	20465.648
TAX PROVISION	280.000	406.000	189.000	1883.173	2299.192	2634.783
TAX RATE	7.250%	6.080%	1.901%	12.270%	12.617%	12.867%

NET INCOME	3580.000	6277.000	11259.000	13771.766	16442.788	18890.257
NUMBER OF SHARES OUTSTANDING	2472.000	2512.000	2535.000	2545.939	2545.969	2612.566

EARNINGS PER SHARE	1.448	2.500	4.440	5.430	6.448	7.523
EBITDA REPORTED	3227.000	6041.000	11860.000	13952.000	16273.033	17144.865
PRE-TAX PROFIT REPORTED	2970.000	4409.000	9941.000	10489.767	14498.144	18797.066
NET INCOME REPORTED	2796.000	4332.000	9752.000	9971.386	13776.212	15991.441
EARNINGS PER SHARE REPORTED	1.130	1.725	3.850	3.960	5.431	6.348
DIVIDEND PER SHARE	0.160	0.160	–	0.175	0.233	0.200
Guidance	T	–	–	–	–	–
BALANCE SHEET
CASH AND CASH EQUIVALENTS	10896.000	847.000	1990.000	17750.847	27758.687	25785.000
INVENTORY	979.000	1826.000	2605.000	2970.894	3391.938	4117.000
CURRENT ASSETS	13690.000	16055.000	28829.000	36284.263	48378.400	65243.500
TOTAL ASSETS	17315.000	28791.000	44187.000	51812.619	64515.388	81997.500
CURRENT LIABILITIES	1784.000	3925.000	4335.000	5436.663	5570.307	7127.000
CURRENT DEFERRED REVENUE	141.000	288.000	300.000	2552.000	2552.000	–
TOTAL DEBT	1991.000	6963.000	10946.000	10946.500	10946.500	–
NET DEBT	-8906.000	6116.000	-10262.000	-15275.726	-21666.297	-26814.472
SHAREHOLDERS EQUITY	12204.000	16893.000	26612.000	33893.982	45418.682	54473.863
GOODWILL	618.000	4193.000	4349.000	4347.909	4347.909	4365.000
NET ASSET VALUE	12204.000	16893.000	26612.000	32997.888	44388.729	51557.000
BOOK VALUE PER SHARE	4.985	6.813	10.645	13.420	17.467	19.283
TANGIBLE BOOK VALUE PER SHARE	4.713	4.018	7.970	11.583	16.968	–
ENTERPRISE VALUE	133273.840	328261.800	610458.100	440116.927	432357.433	426161.656
TANGIBLE BOOK VALUE	11537.000	9963.000	19924.000	27104.085	38030.482	–
CASH FLOW STATEMENT
NET WORKING CAPITAL	11906.000	12130.000	24494.000	–	–	–
INCOME TAXES PAID	176.000	249.000	396.000	–	–	–
CASH FLOW FROM OPERATIONS	4761.000	5822.000	9108.000	13437.947	16799.471	18863.833
CAPITAL EXPENDITURES	489.000	1128.000	976.000	1533.649	1626.453	1718.288
CASH FLOW FROM INVESTING	6145.000	-19675.000	-9830.000	-65.167	-2215.000	-4795.500
FREE CASH FLOW	4272.000	4694.000	8132.000	12192.153	15147.902	15890.278
FREE CASH FLOW PER SHARE	1.720	1.868	3.210	4.878	6.302	5.645
TOTAL DIVIDENDS	390.000	395.000	399.000	567.656	630.989	395.000
CASH FLOW FROM FINANCING	-792.000	3804.000	1865.000	-6149.492	-6162.990	-3943.000
CASH FLOW PER SHARE	1.925	2.318	3.590	5.672	6.555	7.330
VALUATION METRICS
RETURN ON ASSETS	23.390%	27.230%	30.859%	25.989%	33.445%	–
RETURN ON EQUITY	33.230%	77.830%	51.759%	39.932%	42.342%	42.610%
RETURN ON CAPITAL EMPLOYED	24.050%	27.360%	31.839%	28.400%	28.000%	–
RETURN ON INVESTED CAPITAL	104.760%	52.030%	77.614%	38.945%	43.815%	22.510%
PRICE/SALES RATIO	–	–	19.300%	14.290%	14.050%	12.970%

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Nvidia Stock Deep Dive Analysis: NVDA price target at $205 with strong revenue growth