NVIDIA Ends Week in the Red — What's the Long Term Outlook?

One of the biggest losers as of today's afternoon session is semiconductors company NVIDIA, whose shares are down -1.5%. At $166.98, NVDA is 14.29% below its average analyst target price of $194.83. The average analyst rating for the stock is buy. NVDA lagged behind the S&P 500 index by -23.3% over the last year, returning -39.0%.

NVIDIA's trailing 12 month P/E ratio is 44.8, based on its trailing Eps of $3.73. The company has a forward P/E ratio of 38.7 according to its forward Eps of $4.31 — which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 26.5, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

NVDA’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for NVIDIA, we obtain a PEG ratio of 2.44, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on NVDA's margins:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2022-01-30 26,914,000,000 9,439,000,000 64.93 2.56
2021-01-31 16,675,000,000 6,118,000,000 63.31 2.13
2020-01-26 10,918,000,000 4,150,000,000 61.99 1.27
2019-01-27 11,716,000,000 4,545,000,000 61.21 n/a
  • Average gross margin: 62.9%
  • Average gross margin growth rate: 2.0%
  • Coefficient of variability (higher numbers indicating more instability): 2.6%

We can see from the above that NVIDIA's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From NVIDIA's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2022-01-30 9,108,000,000 -976,000,000 8,132,000,000 73.24
2021-01-31 5,822,000,000 -1,128,000,000 4,694,000,000 9.88
2020-01-26 4,761,000,000 -489,000,000 4,272,000,000 35.92
2019-01-27 3,743,000,000 -600,000,000 3,143,000,000 n/a
  • Average free cash flow: $5,060,250,000.00
  • Average free cash flow growth rate: 39.7%
  • Coefficient of variability (the lower the better): 42.5%

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NVDA have received an annualized dividend yield of 0.1% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for technology companies is 5.57. In contrast, the average P/B ratio of the S&P 500 is 2.95. NVIDIA's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 19, so it's likely that equity investors are over-valuing the company's assets.

Since it has an inflated P/E ratio, an elevated P/B ratio, a steady stream of strong cash flows with an upwards trend, NVIDIA is likely fairly valued at today's prices. The company has strong growth indicators because of an above average PEG ratio and consistently strong gross margins with a positive growth rate. We hope you enjoyed this basic overview of NVDA's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.