Nvidia At All-Time Highs: Why I’d Pay $83

Summary:

• Yesterday, Nvidia Corporation stock hit an intraday all-time high of $140.87.
• Bank of America raising its EPS estimate for the year and TSMC putting out a strong earnings release may have contributed to the rally in NVDA shares.
• Previously, I thought Nvidia’s mix of steep multiples and high growth made it impossible to value the stock with precision.
• However, TSMC’s capex guidance for 2025 provides a hint that Nvidia’s high growth will continue for at least another year.
• In this article, I explain the logic I used to determine that $83 is a reasonable price for a conservative value investor to pay for Nvidia.

Yesterday, NVIDIA Corporation (NASDAQ:NVDA) hit a new intraday all-time high of $140.87 on news that Bank of America Corporation (BAC) had upgraded its fiscal 2025 EPS estimate for the company to $2.87. Nvidia shares were also likely impacted by the release of Taiwan Semiconductor Manufacturing Company Limited (TSM) aka TSMC’s Q3 earnings, which beat expectations and triggered a 10% rally in that stock the day after they came out.

When I read about Bank of America’s EPS raise and TSMC’s earnings beat, my mind immediately turned to Nvidia. TSMC’s release showed significant growth in revenue and EPS, and beat expectations on both metrics. This fact looked bullish for Nvidia. TSM is NVDA’s contract manufacturer; therefore, the former’s earnings beat and CAPEX guidance raise bodes well for the latter’s revenue. That plus B of A upping its EPS estimate for the year got me feeling more bullish on Nvidia than I had before. News that Stanley Druckenmiller said he’d regretted his earlier decision to sell NVDA also contributed to this nascent bullishness.

That being said, a feeling is just a feeling, and I’m not the type of person to invest based on gut instincts. Whether a stock goes up long-term mostly has to do with whether the discounted value of its future cash flows is worth more than the current stock price; the investor’s feelings have nothing to do with it.

So, I set out to determine what price exactly I’d be comfortable buying Nvidia at. After hashing out some assumptions, building a rudimentary Excel model, and then running the discounted cash flow (“DCF”) math based on the model, I arrived at a price target:

$83.

$83 seemed to me a reasonable price for a conservative value investor to pay for Nvidia stock. Today, after re-reading my Excel model, I still think it is.

I’m not saying that a price higher than $83 for Nvidia is ridiculous. Some investors are pretty good at forecasting and extrapolating growth stories into the future, but that isn’t my approach. As a value investor, I make assumptions that run against the bull thesis and only buy if the asset proves worth the investment under such punishing assumptions. In Nvidia’s case, that means assuming that on-device AI sends some money in Apple Inc. (AAPL) and QUALCOMM Incorporated’s (QCOM) direction, and that Advanced Micro Devices, Inc. (AMD) eventually comes out with viable alternatives to Nvidia in the data center. We’re not there yet, but it is prudent to assume that these two threats to Nvidia’s moat become realities, lest we get carried away with overly rosy forecasts.

When I last covered Nvidia, I rated it a hold because of its mix of a steep valuation and very fast growth. This has been the theme of my Nvidia coverage just about since I started it. Given the current stock price, I am still not prepared to buy NVDA stock. But this week’s flurry of bullish news for the company has got me thinking about it to the point where I have, for the first time ever, settled on an entry price at which I’d start buying. In the ensuing paragraphs, I will explain in detail why I’d buy NVDA if it declined in price to $83.

How Much Will NVIDIA Earn in the Future?

Before you can value a stock, you need some idea of how much the underlying company will earn in the future, and in what timeframe. An ‘X’ P/E ratio means entirely different things for a company that trades at ‘X’ and will continue growing rapidly, and a company that trades at ‘X’ with no growth prospects. The ratio of price to lifetime earnings is actually lower for the former company. The reason P/E ratios are given relative to one year’s earnings (either last year or the coming year) is because forecasting future growth is difficult. Nevertheless, if you spend enough time thinking about it, you can come up with a fairly accurate forecast and, if you do so, you can feel justified in using metrics like the PEG (price/earnings/growth) ratio.

The PEG ratio gives us one clue about why people keep buying Nvidia stock despite all of its other multiples being sky-high: this specific ratio is only 0.15. Investors generally prefer to buy when the PEG ratio is below one, so Nvidia passes that test easily.

However, the problem with using the PEG ratio indiscriminately is that you can’t just assume high growth will persist for no reason. You need to have a specific idea of how much the company will earn in the future; only then can you decide whether its growth will continue.

So, we need to look at some factors that will determine how much Nvidia earns in the future.

Competitive Landscape

One thing that Nvidia has going for it right now is a strong competitive position. It has a market share between 75% and 90% in AI accelerator chips; its chips are integrated with its CUDA computing platform which raises switching costs; and finally, developers optimizing their software for Nvidia gives the company a network effect where new apps have to be optimized for Nvidia to be compatible with other apps that use Nvidia. That’s two of the four main moat sources right there, and Nvidia has various patents as well, so in truth it probably has three out of four.

However, there are some signs that Nvidia’s moat may not endure for long. Alphabet Inc. (GOOG) has a Tensor Processing Unit that Apple used instead of Nvidia chips for training Apple Intelligence. Cerebras AI has a computing platform with over a trillion transistors that is reportedly 20 times faster than the H100. Advanced Micro Devices, Inc. (AMD) M1325X chipset is widely considered a viable Nvidia alternative. So far, these various developments haven’t eaten into Nvidia’s market share, but the technical advancements they represent are real. Probably, with enough funding, they will begin eating into Nvidia’s moat, which will reduce its pricing power.

Power of Suppliers

Another factor in the durability of Nvidia’s moat is the power of its suppliers. The biggest one of these is TSMC, and its power is considerable. TSMC is a large supplier to Nvidia, and its competitors don’t have anywhere near the same capacity. Although Nvidia relies on Samsung Electronics Co., Ltd. (OTCPK:SSNLF) for some processors, it can’t get its entire order book filled without TSMC. Nvidia is 11% of TSMC’s business at least, and that 11% is more than half the size of Samsung’s entire foundry revenue stream. It seems like Nvidia needs TSMC to keep delivering GPUs to customers, and most industry experts expect Nvidia to accept TSMC’s coming price hikes.

Valuation

Having explored the two most important aspects of Nvidia’s future prospects, I’m now ready to model its future earnings.

Here are the assumptions:

• Revenue will grow at 111% year-over-year by the end of this year compared to fiscal 2024, a rate consistent with B of A’s earnings forecast and TSMC’s CAPEX guidance.

• Next year, the growth rate will slow to 70% mainly due to base effects (i.e., continued growth being harder after a previous high-growth period).

• The year after that, AMD and other companies’ competing products started going mainstream, resulting in Nvidia’s growth slowing to 20%.

• In the next three years, the growth rate will slow from 10% to 6% reflecting rising competitive pressures and increasing base effects.

• COGS, operating expenses and interest/taxes combined, all grow at rates commensurate with the revenue growth in the same year. This is consistent with the past trend in Nvidia’s business.

These assumptions produce the following income statement model:

REVENUE	$129,074.26	$219,426.24	$263,311.49	$289,642.64	$312,814.05	$331,582.90
COGS	$31,003	$52,705.10	$63,246.12	$69,570.73	$75,136.39	$79,644.57
SG&A	$18,203	$30,945.10	$37,134.12	$40,847.53	$44,115.33	$46,762.25
EBIT	$79,868.26	$135,776.04	$162,931.25	$179,224.38	$193,562.33	$205,176.07
INTEREST & TAX	$10,000	$17,000.00	$20,400.00	$22,440.00	$24,235.20	$25,689.31
NI	$69,868.26	$118,776.04	$142,531.25	$156,784.38	$169,327.13	$179,486.76
SHARES	24,631	24384.69	24140.8431	23899.43467	23660.44032	23423.83592
EPS	$2.84	$4.87	$5.90	$6.56	$7.16	$7.66
Discounted EPS		$4.44	$4.92	$4.98	$4.96	$4.85

Click to enlarge

​​As you can see, our model has EPS gradually growing from the $2.84 base amount to $7.66. The starting amount of $2.84 is consistent with B of A’s $2.87 estimate, but a little lower.

Without discounting, the five annual amounts sum to $32.15. As for the discounted value of these amounts:

According to Statista, the market risk premium in the U.S. is 5.5%. Adding that to the current 10-year (US10Y) treasury yield (4.09%) gives us a 9.59% discount rate. Valuing the EPS figures above at this rate produces $24.15 in present value for the cash flows in the discrete forecast period.

Next, we need a steady state growth rate estimate. This is always challenging to come up with. However, we know that the long-term U.S. GDP growth rate is 3.21%, and that a company logically can’t grow faster than the economy forever. Otherwise, it would end up bigger than the economy. So I’ll put Nvidia’s steady state growth rate at 2%, comfortably below GDP growth but not nothing. With this assumption, Nvidia’s final forecasted cash flow is $7.82, and that’s worth $102.98 discounted at 9.59% minus 2%. This $102.98, discounted back to the present, is worth $59.44. And finally, $59.44 plus $24.15 for the discrete forecast period is worth $83.59. To err on the side of caution, I’ll round down instead of up, and call $83 the price at which I’d buy NVIDIA.

The Bottom Line

This week, investor enthusiasm about Nvidia reached a fever pitch. Driven by TSMC’s blowout numbers, B of A’s EPS estimate and Druckenmiller’s regret over his sale, the stock soared to new heights. For me, the enthusiasm was contagious enough to get me digging into the numbers to locate a clear price target. Ultimately, the $83 target I got was far below the current price. But perhaps in a future recession or 2022-style tech sector downturn, I’ll get it. As for those buying at today’s prices: I think they’re taking a big risk, but I wouldn’t take the opposite side of their trading by shorting Nvidia.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSM, BAC, GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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