To The Moon

$NVIDIA(NVDA)$

We've had two trading days in 2025, and Nvidia has already risen by nearly 8%, potentially signaling what's to come. One key event to note is that Nvidia's CEO will speak at the CES conference on January 7th. More importantly, the JPMorgan Healthcare Conference is set for January 13th, which is especially significant for Nvidia. One of the main topics of discussion will be the role of AI in the consumer health industry. This matters because last year, during a similar event, Jensen Huang, Nvidia's CEO, made significant remarks on the industry, unveiling new innovations and products. Analysts responded positively, and Nvidia's stock has risen 24% over the past year, with Wall Street continuing to hold a strong buy rating. Some analysts even predict Nvidia could reach $190 in the coming weeks.

In a Forbes article from a few months ago, it was predicted Nvidia could achieve a $5 trillion valuation. Bank of America has raised its target from $165 to $200, although some consider this optimistic, given the company's substantial growth over the past year and decade—up around 27,000%. Analysts are forecasting another strong year, with some believing Nvidia can maintain its position as the most valuable company in the S&P 500. Analyst valuations vary, with some suggesting a price target as low as $102 (representing a downside) and others predicting $220, which would be a significant increase. The average target is currently $173.

At the start of 2024, analysts greatly underestimated Nvidia's potential, but its growth has been exceptional. Looking at quarterly growth, much of it is driven by the data center segment, which saw a dramatic increase from the same quarter in FY 24. Analysts expect double-digit year-on-year growth for the next four quarters, and the company has a flawless track record, beating earnings estimates in every one of the past four quarters.

Looking at Nvidia's forward P/E ratio for the fiscal year 2026, the earnings estimate of $4.43 puts the forward P/E at 32.6, which is above the S&P average but below Nvidia's five-year average of 42.9. This suggests potential undervaluation, although we always look at a range of models. Nvidia's dividend score is a solid 89, with a yield of just 0.03%. Although they increased the dividend by 150% last May, it's important to note that a dividend cut is highly unlikely.

While Nvidia’s dividend yield is low, the company has consistently increased its dividend over the past 11 years. Regarding valuation, using the 5-year average P/E ratio model, Nvidia currently sits below the lower end of its fair value range, which indicates it might be undervalued. Additionally, its forward P/E being lower than the 5-year average also suggests undervaluation.

Nvidia does trade at a premium compared to the broader tech sector, with a P/E of 32.6 compared to the sector’s 25. However, it is a company that likely warrants that premium, and we’ll look more closely at how much of a premium it deserves in our updated valuation.

Focusing on free cash flow, Nvidia's has been low, with a 1% expected increase over the next 12 months, indicating a preference for share buybacks over dividend increases. Nevertheless, free cash flow per share has seen substantial growth since 2023, and if current trends continue, Nvidia’s free cash flow could reach $60 billion for the fiscal year, surpassing the previous year's figure of $27 billion. While Nvidia’s valuation may seem expensive, its growth potential makes it a reasonable and potentially attractive investment.

We’ve already observed a few signs of undervaluation. Regarding sales growth, we typically expect 3-7%, with 3-4% just to keep up with inflation. While growth has been a bit inconsistent, there's been significant growth in 2024, particularly in the trailing 12 months, and we don’t expect this to slow down. Analysts and management alike foresee continued expansion, with many predicting a 30-50% compound annual growth rate over the next decade. Nvidia sees opportunities worth trillions in AI, accelerated computing, and traditional data centers, highlighting substantial growth potential.

In terms of numerical performance, total sales have surged, especially in the past year, and are projected to keep increasing. As we’ve mentioned, examining shares outstanding helps us gauge whether a company returns excess cash to shareholders through buybacks. While Nvidia has diluted shares by about 10% since 2015, they’ve significantly outperformed the S&P, and since 2022, they’ve initiated buybacks, using around $26 billion in repurchases in FY2, with nearly $46 billion left for buybacks.

ROIC (return on invested capital), one of our favorite metrics, has been impressive, reaching 61% in 2024 and 92% on a trailing 12-month basis. Their margins are also strong, with operating margins exceeding 16%, currently at 63%, and a free cash flow margin of 50%. Regarding debt, Nvidia’s net debt to EBITDA ratio is one of the best in the industry, at zero—meaning it could pay off all debt instantly using its cash reserves.

Nvidia also continues to generate strong free cash flow, with $96 million in 2015 and nearly $60 billion in the most recent trailing 12 months. Despite a high valuation, Nvidia’s premium seems justified when compared to its sector performance. Over the past year, it’s outperformed the S&P 500 significantly and has led the semiconductor sector, gaining more than 30,000% over the last 10 years.

Looking at our valuation, we’ve derived an intrinsic value of $179 based on the DCF model, suggesting a 23% upside from the current price. However, some analysts predict even higher valuations, with some seeing $220, $250, or even $300 in the next 2 years. Bloomberg forecasts a 42% annual growth for the industry over the next decade, which could push Nvidia’s value to $464, representing a potential 220% upside.

Based on these calculations, we apply a margin of safety to determine an ideal buy price. Given the 10% margin, the target buy price is $162, which aligns closely with Wall Street’s strong buy rating and an expected 22% upside.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub