Investing in Nvidia: Is Now the Right Time?

Today, I want to discuss Nvidia—a company that's been making waves in the market—and share the price point at which I’d consider buying their stock. But first, let's dive into what makes Nvidia so impressive.

If you’re not talking about Nvidia, what are you even talking about? This company has been a powerhouse in the S&P 500 over the last few years. Just look at the stock price—up 3,000% in the last five years, 26,000% in the last 10 years, and a staggering 310,000% since it went public. Despite a slight dip recently, Nvidia's performance has been nothing short of extraordinary. Even after a 10-for-1 stock split, it’s still holding strong.

So, what makes Nvidia so great? First off, Nvidia’s market cap and value are essentially the same, indicating minimal debt. The company is also a cash-generating machine, pulling in $39 billion last year, up from $12.5 billion over the previous five years. This growth in free cash flow is absolutely incredible. However, with a price-to-free cash flow ratio of 82 and a PE ratio of 75, it's clear that Nvidia's stock is expensive.

Does that mean you shouldn’t buy Nvidia? Not necessarily. If Nvidia can continue growing its revenue and profit by, say, 50% annually for the next 20 years, the current price might still be worth it. But here's the tricky part—investing is all about the present value of future cash flows, and predicting the future is tough. That's why you need a margin of safety.

If you're only focused on a stock’s short-term price movements, you're not investing—you're speculating. We want to shift that paradigm. When you buy a stock, you’re buying a piece of a business. Over time, as the company’s revenue and profit grow, so should the stock price. However, fluctuations along the way are inevitable.

Take Nvidia, for example. It reached a high of $35 per share in November 2021 and then dropped to $12 per share. That’s a 65% drop in just a year and a half. If you only looked at the stock price during that time, you might think Nvidia was a dud, much like some did with other tech giants in the past. But Nvidia rebounded tenfold. How many people can stomach a 60% drop in their stock and still hold on? Not many, I’d guess.

It's crucial to think long-term. When people tell me they're up over the last six months, I always remind them that we're not even close to determining whether their investment process is solid. In the short run, stocks are a voting machine; in the long run, they’re a weighing machine.

Now, let’s dig into Nvidia’s financials. The company boasts a gross margin of 75%, up from the 60-65% range just two years ago. That’s how much they’ve been crushing it. But what about the dividend yield? Nvidia paid out $395 million last year. While that might seem like a positive, I think it’s a waste of time considering how much cash the company generates.

Next, let’s look at Nvidia’s revenue growth. Over the last 10 years, their revenue has skyrocketed—from $4.7 billion to a staggering $80 billion in the last 12 months. That’s nearly 17 times growth in a decade. Usually, this kind of rapid expansion is a cause for concern, but Nvidia continues to defy expectations.

Even Bill Gates recently noted in an interview that Nvidia is a "real company with real revenue, real profit, and real good products." Nvidia has been dominating the graphics processor market since the 1990s, and it’s no surprise they’re still on top. However, we’ve seen similar stories before—companies like Cisco, Intel, and even Microsoft were once the darlings of the market, only to see their stock prices fall drastically.

Now, let’s talk about Nvidia’s future. Analysts estimate that Nvidia’s profit will grow from $1.27 per share this year to $5.83 in the next four or five years—a 4-5x increase. Revenue is also expected to triple in that time. While these projections are promising, sustaining such growth is challenging, especially with increasing competition from companies like AMD.

Nvidia is reporting earnings this week, so keep an eye out for that. In the meantime, if you’re serious about making informed financial decisions, I recommend checking out our Everything Money community. We offer a comprehensive suite of tools for analyzing stocks, retirement planning, and even real estate. And if you join now, you’ll be grandfathered in for life, keeping your price level forever.

Finally, let’s get into the analysis. Using our stock analyzer tool, I focused on middle assumptions—20% revenue growth over the next 10 years, a 40% profit margin, and a PE ratio of 25. With these assumptions, Nvidia’s intrinsic value comes out to $103 per share, while the stock is currently at $127. If my assumptions are correct, this suggests a potential 6.5% return.

For a more conservative approach, I also looked at lower and higher assumptions. On the low end, I used 10% revenue growth and a 20 PE ratio; on the high end, 30% revenue growth and a 30 PE ratio. This gave me a range of $30 to $318 per share, reflecting the uncertainty surrounding Nvidia’s future.

In summary, if you believe in Nvidia's growth story, it might be worth considering at a lower price. However, always remember to have a margin of safety in your investments, because the future is uncertain, and mistakes can happen.

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