Is Nvidia set for another rally to reach all-time highs after its recent decline? Let’s estimate Nvidia’s FV based on Q2 earnings report.
(Picture: BoliviaInteligente, Unsplash)
Background
Nvidia emerged as one of the hottest stocks of 2024, with its share price skyrocketing by nearly 200% at its peak. This surge was driven by Nvidia’s pivotal role in AI and data center technologies, sectors that are seeing massive growth.
However, the stock took a sharp turn after its Q2 earnings release on August 28, despite beating estimates across all major categories, including Earnings Per Share (EPS) and revenue, especially in its highly anticipated data center segment. The company also announced a massive USD 50 billion share buyback, which normally would be seen as a bullish signal.
Yet, the stock tumbled 6% the day after earnings and dropped a further 15% in the first week of September.
The key question now is whether Nvidia is on the rise again, and if it could hit an all-time high.
Mixed Sentiments from Analysts
Despite the recent volatility, many leading analysts still rate Nvidia stock as a BUY. According to MarketBeat, the consensus price target is around USD 142 per share, with highs reaching USD 200 and lows hitting USD 65. Some notable Wall Street investment banks have issued diverse price targets:
Goldman Sachs: USD 135 per share
Bank of America: USD 165 per share
Citigroup, Morgan Stanley: USD 150 per share
On the other hand, several European banks have taken a more conservative stance:
Deutsche Bank: USD 100 per share
BNP Paribas: USD 75 per share
Why are so many respected analysts still hyped about Nvidia, while others have suddenly become sceptical, leading to such a spread in price targets? And do we believe that Nvidia is worth USD 150 or more per share, given its current fundamentals? (Short answer to manage your expectations: no, we don’t.)
Let's break down Nvidia’s fair value estimate based on the Q2 earnings report and answer these questions together. Is it still a BUY? What assumptions make major Wall Street banks believe it’s a BUY, and what is it really — maybe even a SELL?
Our Fair Value Estimate
Based on our fundamental analysis* and a combination of other factors, including Nvidia’s dominant market position, projected revenue growth from AI and the cautious sentiment surrounding its valuation, we estimate Nvidia’s fair value to be around USD 96 per share. This aligns with Deutsche Bank's USD 100 price target but is more conservative than most of the high-end predictions.
Here is the breakdown of the main assumptions:
Revenue in H2 FY25
Nvidia's revenue in FY24 increased year-over-year by 126%, reaching USD 60.9 billion, of which USD 47.5 billion (78%) was attributable to its data center segment, reflecting its leadership in AI infrastructure.
In H1 FY25, Nvidia generated USD 56 billion in revenue (USD 26.0 billion in Q1 and USD 30.0 billion in Q2), slightly lower than the total revenue for the entire FY24. According to Nvidia’s outlook for the Q3 of fiscal 2025, revenue is expected to be USD 32.5 billion, plus or minus 2%. This represents approximately 8% quarterly growth compared to Q2.
For Q4, however, we anticipate growth of at least 15%, which would result in Q4 revenue of ca. USD 37.4 billion. This assumption is driven by the Blackwell platform, set to ramp up production in Q4. CFO Colette Kress noted that Blackwell will generate several billion dollars in Q4 revenue and will be a game-changer for the industry. According to him, it is not just a graphics processing unit (GPU) but an AI infrastructure platform that increases AI throughput by 3 to 5 times compared to Nvidia's Hopper platform.
As a result, we forecast total revenue of USD 69.9 billion for H2 FY25.
Revenue growth in FY26 - FY29
Total revenue of USD 69.9 billion for H2 FY25 constitutes a year-over-year growth of approximately 107%. We have assumed annual growth declining from 50% in FY26 to 20% in FY29. We believe that exponential growth is unsustainable in the long term and will eventually reach saturation. This more moderate growth trajectory reflects the inevitable slowdown that even market leaders experience as they mature, especially in highly competitive sectors like AI and data centers.
Additionally, based on our benchmarking analysis of semiconductor peer companies (Taiwan Semiconductor Manufacturing, Broadcom, AMD, Qualcomm, Micron, Intel) and major tech companies investing heavily in AI (Microsoft, Apple, Alphabet, Meta, Amazon, Tesla), the average revenue growth in FY24 and FY25 varies between 20%-26% and 10%-12%, respectively.
Therefore, it is reasonable in our view to gradually decrease the revenue growth to at least 20% in the explicit forecast period.
This viewpoint aligns with the majority of leading analysts, who also project a 20%-30% compound annual growth rate (CAGR) for Nvidia between FY26 and FY29.
Revenue growth in terminal value (TV)
Based on our best practice, the terminal growth rate (TGR) is derived from the long-term (2050) inflation forecast for the countries where a company generates its revenues. In FY24, Nvidia generated most of its sales in the USA, Taiwan and China (44%, 22% and 17%, respectively). The sales-weighted average long-term inflation rate for these countries is approximately 1.9%.
Alternative approaches for determining the TGR include applying a weighted average GDP growth rate based on the country sales split, which would result in a TGR of approximately 2.5%.
Finally, another widely accepted market practice is using the yield on the 10-year government bond as the basis for the long-term growth rate. The yield reflects long-term expectations of inflation, interest rates and economic stability, making it a reliable benchmark for future growth projections. This method would result in a TGR of around 3.0%, based on the USA-Taiwan-China sales split.
Overall, since data centers and AI are revolutionary segments currently driving progress in many adjacent areas of the global economy and shaping the future of major industries, we believe it is reasonable to apply a high-end TGR of 3.0%.
Please refer to the conclusion sections below for details on how our TGR assumption differs from the overall consensus and why major investment banks have arrived at a price target of USD 150 per share and above.
Gross margin
According to Nvidia's Q2 earnings report, gross margins for Q3 2025 are expected to be 74.4% to 75.0%, plus or minus 50 basis points. For the full year, gross margins are anticipated to be in the mid-70% range. Since the actual gross margin was 77% in H1 FY25, and gross margins in FY22-FY24 had already reached up to 73%, we believe that a 75% gross margin is overall reasonable.
The gross margin of 75% is slightly above the peer group benchmarking range of approximately 50% to 60%, despite being generally aligned with Broadcom and Microsoft. We believe that Nvidia often has gross margin advantages over its peers, as the data center and AI markets, where Nvidia has a strong presence, tend to offer higher margins compared to traditional consumer markets.
Operating expenses in H2 FY25
According to Nvidia's Q2 earnings report, “full-year operating expenses are expected to grow in the mid- to upper-40% range.” Given that operating expenses in FY24 amounted to USD 9.8 billion, anticipating a roughly 49% increase would result in operating expenses for FY25 amounting to USD 14.6 billion.
Since actual operating expenses incurred in H1 FY25 were USD 7.4 billion, this would result in residual operating expenses for H2 FY25 of USD 7.2 billion and lead to an EBITDA margin of approximately 65%.
EBITDA margin in FY26 to TV
While Nvidia has demonstrated strong profitability, several factors could pose challenges in sustaining a 65% EBITDA margin over the long term.
Nvidia’s focus on emerging technologies like AI and data centers requires substantial investments. While these areas have high growth potential, they also come with high costs and uncertain returns, which can impact overall profitability. In mature markets, like gaming GPUs or traditional data center applications, growth rates might slow, which could lead to pricing pressure and reduced margins.
Furthermore, despite several peers anticipating similar or even higher EBITDA margins in FY24-FY25 (e.g., TSM, Broadcom: 61%-68%), the average EBITDA margin of the peer group varies between 40% and 50%.
Therefore, we deem it reasonable to gradually decrease the EBITDA margin from 65% to 50% in the terminal value.
Depreciation and Capex
For simplicity, to account for the increased asset base, including servers and production capacities, we increased depreciation in line with annual revenue growth. Investments in Capex were kept equal to depreciation.
While we acknowledge that Nvidia’s Capex is generally lower than that of its peers, this is reasonable given that Nvidia does not manufacture the chips itself. As a chip designer, Nvidia does not need to invest heavily in building manufacturing facilities.
Income tax expense
Based on Nvidia’s outlook for the third quarter of fiscal 2025, tax rates are expected to be 17%, plus or minus 1%, excluding any discrete items.
For FY26 and beyond (terminal value), we assumed an average effective tax rate of 24%, based on the respective corporate income tax rates for the countries involved, including the USA, Taiwan and China, as per the sales split mentioned above.
Net working capital
The total net working capital is derived as operating cash plus trade receivables plus inventory and other current assets, less trade payables and other current liabilities.
Based on H1 FY25 results, the NWC amounts to approximately USD 18.5 billion, which roughly corresponds to 16.5% of sales on an annualized basis.
We have assumed an NWC-to-sales ratio of 16.5% for FY25 and the terminal value, derived the NWC based on sales levels and that ratio, and then calculated the change in NWC to determine the NWC investment.
WACC
The WACC was derived using a risk-free rate based on the weighted average yield of 10-year government bonds from the USA, Taiwan and China, a median beta and capital structure from both a narrow peer group (semiconductor companies including TSM, Broadcom, AMD, Qualcomm, Micron, Intel) and a broad peer group (tech companies including Microsoft, Apple, Alphabet, Meta, Amazon, Tesla).
No size premium was applied due to Nvidia’s large-cap market capitalization.
Additionally, we used a weighted average corporate income tax rate of 24% and best practice assumptions for other parameters such as the market risk premium, credit spread, etc.
The resulting WACC is approximately 8.7%, which we consider appropriate for discounting Nvidia's free cash flows.
Net debt / Net cash
To bridge enterprise value to equity value, we have derived net debt, which in this case represents excess cash.
As of 31 July 2024, Nvidia does not have any short-term financial debt, only long-term debt and lease liabilities totalling USD 9.8 billion.
We have subtracted non-operating cash to calculate net debt, i.e., total cash of USD 34.8 billion less USD 7.6 billion required to finance daily operations, which historically has roughly corresponded to 3-month-COGS and 6-month-OPEX.
As a result, the total net cash is USD 17.4 billion, leading to an equity value of approximately USD 2.4 trillion as of 31 July 2024.
Fair Value Conclusion
Based on the weighted average number of diluted shares (24’848 million) provided in Nvidia's Q2 earnings report, we believe the fair value of Nvidia’s stock is USD 96 per share.
This is approximately 6.7% undervalued compared to the current market price of USD 103 as of 8 September 2024, when this analysis was prepared.
Why Do Large Banks Arrive at FV Conclusions of USD 150 and Above?
The main reason for the higher DCF valuation from larger investment banks is their terminal growth rate assumption. As discussed above, we assumed a TGR of 3%, based on the yields of 10-year government bonds. We understand that most Wall Street analysts anticipate a 5-6% growth rate and consider this to be a reasonable long-term growth rate as AI matures.
Here is a quick sensitivity analysis of our fair value estimate, assuming different TGRs:
3% (base case): USD 96 per share
5%: USD 140 per share
5.5%: USD 160 per share
A TGR higher than inflation and GDP growth is not considered best practice because it assumes that the company or industry will indefinitely outpace the broader economy, which is unrealistic over the long term. Current estimates suggest that global GDP growth will be around 3% by 2029. If a specific industry, such as AI, grows at 5% perpetually, it would eventually surpass the entire world economy, leading to the unrealistic scenario where the global economy would consist solely of that industry. This is why TGRs in line with long-term GDP growth rates (around 2%-3%) are more prudent assumptions for DCF models.
Nesterovs Advisory Recommendation: HOLD
A 6.7% overvaluation isn’t extreme, and if you believe in Nvidia’s long-term growth prospects, particularly in AI and data centers, it may be worth holding onto the stock**. Nvidia’s leadership position in cutting-edge sectors could drive future growth, potentially pushing the stock higher than the current price.
*Note: please note that this is a very high-level and simplified extract from our Nvidia fundamental stock analysis report, which also includes a detailed financial model, company overview, historical financials, industry and market analysis, risk assessment and further information. If you would like to receive the full report or any other fundamental analysis to enhance your investing strategy, please don’t hesitate to reach out to us.
**Disclaimer: this article is for illustrative and informational purposes only and does not obligate you to make any investment decisions. We do not accept responsibility for any decisions made based on this article, which does not represent a comprehensive report. Please conduct your own due diligence before making any investment decisions.
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