To The Moon

To determine whether a stock is expensive or cheap, one needs to estimate its fair value. Below is one way to down a “fair value” analysis for Nvidia. Let’s walk through one simplified example of a Discounted Cash Flow (DCF)–style approach using a set of reasonable assumptions. (Note that the true answer depends on the many variables in our estimates, but this will illustrate the process.)

Step 1. Estimate Next‐Year Earnings

Many analysts currently estimate that – after the temporary disruption from DeepSeek and trade concerns – Nvidia’s forward EPS is roughly in the $4–$5 range. For this example, let’s assume EPS₁ = $5.00 for fiscal 2025.

Step 2. Choose a Growth Rate

Because Nvidia is still a leader in the AI chip and data-center space, you might expect strong earnings growth for a few years. However, near‐term headwinds (like export controls and production issues with the new Blackwell chips) could dampen growth relative to its past triple-digit gains. A conservative, more sustainable annual EPS growth rate of around 20% might be reasonable. (If you assume too high a rate, you’ll end up with an unreasonably high fair value.)

Using 20% growth, EPS in 5 years would be:

  EPS₅ = $5.00 × (1.20)⁵ ≈ $5.00 × 2.488 ≈ $12.44

Step 3. Estimate a Terminal Multiple

At the end of the projection period, we assume that Nvidia will trade at a terminal P/E ratio that reflects a mature company. Let’s use a terminal multiple of 25 (a figure in line with large tech companies, though there’s always debate on the exact number).

So, the terminal price at Year 5 is:

  Terminal Price = EPS₅ × Terminal P/E = $12.44 × 25 ≈ $311.00

Step 4. Discount the Future Earnings

Now, choose a discount rate (often the weighted average cost of capital, WACC). For a high-growth tech company like Nvidia, a discount rate in the neighborhood of 10% is commonly used in such models.

We then discount the terminal value (and—in a more complete DCF, also the free cash flow stream) back to today over 5 years. For the terminal value alone:

  PV(Terminal Value) = $311.00 / (1.10)⁵

  (1.10)⁵ ≈ 1.611

  PV(Terminal Value) ≈ $311.00 / 1.611 ≈ $193.00

In a full DCF, you would also discount the individual annual EPS (or free cash flow) streams from Years 1–5. A simplified method is to assume that the sum of those discounted cash flows might add roughly another 10–15% on top of the terminal value’s contribution. In our example, that would lift the “fair value” to roughly $170–$190 per share.

Summary of the Analysis

• EPS₁ (FY2025 forecast): $5.00

• Growth Rate: 20% per annum for the next 5 years

• EPS₅: ≈ $12.44

• Terminal Multiple: 25×, implying a terminal price of about $311

• Discount Rate: 10%

• Present Value of Terminal Value: ≈ $193

• Adding the present value of earlier cash flows brings the estimated fair value roughly into the $170–$190 per share range.

Caveats and Considerations

• Short-Term vs. Long-Term: The recent rout has been driven by near-term concerns (tariffs, supply issues, and DeepSeek-related fears). The long-term fundamentals—strong demand for AI chips and data center products—remain intact.

• Sensitivity to Assumptions: If you adjust the growth rate (say, to 15% or 25%) or the discount rate (to 9% or 12%), your fair value estimate can change significantly. Analysts’ consensus currently hovers in the mid-$170 range, which aligns with a more conservative outlook.

• Other Valuation Methods: You could also use relative valuation (comparing Nvidia’s P/E and PEG ratios to its peers) or an FCFE (Free Cash Flow to Equity) model. Each method has its own sensitivities, but they broadly support a fair value in the $170–$175 range given the company’s current fundamentals and market position.

Conclusion

Based on this DCF analysis—with the assumptions of $5 EPS next year, a 20% annual growth rate for 5 years, a terminal P/E of 25, and a 10% discount rate—the fair value comes out in the vicinity of $170–$190 per share. Given the near-term volatility from trade and competitive concerns, many analysts are converging on a fair value estimate in the mid-$170 range.

However, even with conservative assumptions, it appears that Nvidia’s current trading price (around $127) is depressed relative to its longer-term fundamentals.

For these reasons, I find the current market reaction both strange and an opportunity.