DCF for NVIDIA Lecture Notes

Introduction

• Purpose: Conduct a DCF (Discounted Cash Flow) for NVIDIA
• Previous DCF received feedback due to outdated stock prices
• Uses Street estimates based on analyst opinions
• Updated with recent earnings report

Agenda

1. NVIDIA situation overview
2. Trading comps
3. WST Street Prep sponsorship
4. Detailed DCF analysis
   • Discounted Cash Flow Model (DCF)
   • Weighted Average Cost of Capital (WACC)
   • Midyear Convention
   • Price Breakdown

NVIDIA Situation Overview

• Blew past earnings recently
• Combined market cap equal to or exceeding Amazon and Tesla, who are trending downwards
• Stock increased by 10-11% in the last few days
• Key details:
  • Quarterly revenue: $26B (up 18%)
  • Announced a 10-for-1 stock split effective June 7, 2024
  • Quarterly cash dividend up 50% to 1 cent per share on a post-split basis

Earnings Performance

• Adjusted per share earnings surged to $6.12 (vs $1.19 a year earlier)
• Revenue more than tripled: $26.04B
• Driver: AI demand and specialized AI chips
• Dominant in gaming GPU market
• Growth opportunities: autonomous driving and edge computing

Risks

• Supply chain issues
• Intense competition from AMD and others
• High valuation concerns
• Companies bringing chip manufacturing in-house

Trading Comps

• Built a comp table for NVIDIA
• Compared to top tech companies and chipmakers
• Market cap comparable to Microsoft, Apple, and Google
• High revenue growth (102% vs. 2024 estimate of 33%)
• High gross margins and EBIT margins
• Trading at high valuations
  • Revenue multiple: $20.80
  • EV/EBITDA multiple: $32.20
  • PE multiple: $40.10

DCF Analysis

Assumptions and Projections

• Historical data and Street estimates considered
• Assumes significant revenue growth
• Revenue growth rates expected to be adjusted upwards by analysts
• Adjusted growth rate projections based on recent performance
• Margins projected using a conservative approach
  • Conservative: Decline to 60%
  • Optimistic: Increase to 68%

Midyear Convention

• Applied to ensure only future cash flows are considered
• Assumes cash flow received in the middle of the year

WACC and Terminal Value

• Initial WACC calculation: 13.56% (considered high)
• Adjusted based on peer company comparisons
• Terminal growth rate: 2-2.5%

Valuation Outcomes

• Implied stock price ranges from $672 to $848 (base/optimistic scenario)
• Conservative estimate in a range of $680 to $840
• Analysis shows Nvidia stock priced for perfection

Conclusion

• NVIDIA continues to surprise with high growth and performance
• Stock is priced optimistically; further room for growth but requires consistent outperformance
• Important for investors to reassess regularly based on new data and trends

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