One of the biggest debates raging on Wall Street in recent months is what to make of Nvidia (NVDA +0.99%). The company was arguably the catalyst for the artificial intelligence (AI) revolution, supplying the graphics processing units (GPUs) that enable the technology. After a run of 1,180% that spanned three years, the stock has fallen 36% from its peak and is back where it was one year ago.
Many investors believe the sell-off is unwarranted and that it’s only a matter of time before Nvidia’s stock price rebounds, particularly in light of the company’s recent forecast. But one classic financial model suggests Nvidia’s stock price should be above $900.
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A different approach
Most Wall Street analysts employ a combination of spreadsheets laden with historical data, sales and profit expectations, and various financial ratios to determine where share prices are going. They tweak their financial models with the latest data in an effort to predict what the stock price “should” be. The formulas vary from analyst to analyst and investment bank to investment bank, which explains the infinite variety of recommendations and price targets.
Analysts at UBS take a different approach. The company’s HOLT platform is widely regarded as one of the industry’s most respected quantitative investing models. “HOLT’s proprietary methodology corrects subjectivity in corporate financial statements by converting income statement and balance sheet information into a cash flow return on investment (CFROI) return, a measure that more closely approximates a company’s underlying economics,” according to the UBS website. This approach focuses on a “company’s historical ability to create wealth and assess if the market is fairly pricing its prospects for value creation.”
And what that financial model says about Nvidia is striking. “We think the share price should be 400% higher,” said John Talbott, the U.S. head of HOLT’s technology coverage. If his calculations are correct, that would push Nvidia’s market cap to more than $22 trillion, compared to its current value of $4.46 trillion (as of this writing). “It’s a big number for investors to swallow,” Talbott continued. “That’s the big pushback I get,” he said.
Today’s Change
(0.99%) $1.81
Current Price
$183.89
Key Data Points
Market Cap
$4.4T
Day’s Range
$180.63 – $184.08
52wk Range
$95.04 – $212.19
Volume
3.5M
Avg Vol
179M
Gross Margin
71.07%
Dividend Yield
0.02%
UBS argues that many accounting metrics distort a company’s true value. The CFROI is a measure that strips away the noise and focuses on one critical thing: How much cash a business generates relative to the money it invests. By stripping out the impact of factors that skew the numbers — like stock-based compensation — investors get a clearer picture of what a stock is actually worth.
The average non-financial company has a CFROI of 6%, while Nvidia’s clocks in at 73% — putting it in the top 0.1% of the 20,000 companies in the HOLT database. “We’ve never seen anything like this in our system — it’s incredible,” Talbot said.
This isn’t the first time an analyst has suggested Nvidia’s market would eclipse $20 trillion. One has gone so far as to predict a value of $50 trillion, while admitting the odds of that are relatively low. Even if those expectations are high, they are likely directionally accurate.
I believe the current market pessimism has simply gone too far. At just 22 times next year’s expected sales, Nvidia stock is a buy, especially if UBS is right.
