Nvidia's Valuation

Short and sweet: Why Nvidia is still a buy.

One of the hottest discussion topics among investors is Nvidia is valuation. Valuation is a subjective matter with no right or wrong answer. I'd love to hear your thoughts on it; please put your thoughts in the comments.

Source: Finchat

The revenue growth seems to be declining, but it is still in triple-digit percentages. It is slowing, but that was expected. In Q4 2024 and Q1 2025, we will see additional revenue from Blackwell.

Given the company's size, looking at the Return on Invested Capital or ROIC for a normalized period, such as the last five years, including the pandemic period, would be beneficial. Nvidia's ROIC for the last five years stands at 54.77%, which has improved by almost 3%.

Based on the price-to-earnings or PE ratio, Nvidia is currently trading at 55.97, which may seem too high. However, if you look at the forward PE ratio, it trades at around 31.5 after the drop. That's not cheap yet, but also not very expensive. For a high-quality business, this can be justified.

Source: Finchat

But, remember that when I made Nvidia a Best Buy Now in December 2023 and January 2024, around (a split-adjusted) $40 and $50, I did this based on the forward PEG. So, let's look at that as well. As we just saw, the forward PEG is 31.46. Earnings growth is expected to be 120% this year. That means a 2024 PEG of 0.26. That's extremely cheap. But let's also look further in the future.

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But before we do that, I want to talk about Finchat shortly. It’s a great platform, with very detailed charts, a fantastic screener, consensus estimates and much more. But you can also interact with the AI. You could ask, for example: ‘Give an overview of everything Nvidia’s management has said about Blackwell since it was announced.” The AI gives you a fantastic overview without you having to go through all the transcripts. You think this expensive, probably, but for $246.5, you already have a Plus subscription for a full year with this link.

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Back to Nvidia and its valuation. Next year, earnings are expected to grow by 40%, while the 2025 PE stands at 26.7. So, that means the 2025 PEG is also only 0.67, still under 1. Remember that under 1 is cheap, between 1 and 2 fair and above 2 expensive.

If we look out even further, to 2026, EPS is expected to grow by 18.3% while the 2026 PE stands at 22.55. This is of course much more speculative, as it's further out. The 2026 PEG would then stand at 1.23, still not expensive.

In addition to the cheap PEGs, the company has shown that it can beat the expectations or even blow them out of the water.

When I hear people talk about Nvidia being a bubble, I think they are more focused on the price than the valuation, in the sense of 'It’s up 109% just this year alone, so it must be too expensive.' But if earnings rise by 119%, it’s actually gotten cheaper. Yes, that’s a rarity in investing and unprecedented for such a big company, but it’s the reality.

Aswath Damodaran, the dean of valuation, valued Nvidia at $87, which is 17% below its current price. I wouldn’t call that euphoric pricing. And when I look at his models, I see very conservative or even pessimistic assumptions, which Nvidia will likely surpass. By the way, he valued Nvidia at around $40 about six months ago, also with overly conservative assumptions. Back then, it was supposedly overvalued by around 60%.

I know that many claim that Nvidia is a bubble, but if I look at the numbers, that’s not what I see. That’s why I still rate Nvidia a buy here.

Of course, there are no guarantees in investing and if the total market acts up, Nvidia will be one of the biggest victims and you might be able to buy it at even cheaper prices. But we can only look at the numbers and projections.

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