NVIDIA Remains a Market Leader in Innovation, but Its Current Valuation May Warrant Caution for Investors Seeking a Margin of Safety

NVIDIA Corp (NASDAQ: NVDA), a technology titan renowned for its graphics processing units and AI innovations, remains a focal point for investors.

Technology behemoth NVIDIA Corp (NASDAQ:NVDA), renowned for its prowess in graphics processing units and AI innovations, continues to captivate investors. As of January 13, 2025, the GuruFocus Discounted Cash Flow (DCF) calculator pegs NVIDIA’s intrinsic value at $81.09 per share. With the stock currently trading at $135.91, this translates to a margin of safety of -67.6%, indicating modest overvaluation based on the DCF model. Let’s delve into the details of this valuation.

Understanding the GuruFocus DCF Model While most DCF models utilize free cash flow, GuruFocus employs a slightly different approach by using EPS without Non-Recurring Items (NRI) instead. This adjustment stems from research indicating a stronger correlation between stock prices and earnings compared to free cash flow, making this model a valuable alternative for valuation.

Critical Assumptions in the Analysis The intrinsic value calculation is premised on the following critical assumptions and inputs:

EPS without NRI

Discount Rate

Growth Stage Assumptions

Terminal Stage Assumptions

Breaking Down the Valuation Growth Stage Contribution: The growth stage encompasses the period of accelerated company growth. Based on the assumptions stated above, the intrinsic value derived from this stage amounts to $121.85.

Terminal Stage Contribution: As NVIDIA’s growth stabilizes, the terminal stage contributes an additional $203.31 to its intrinsic value.

Final Intrinsic Value: Combining these components, the calculated intrinsic value is:

Intrinsic Value = Growth Stage + Terminal Stage = $81.09

Comparison with Market Price At $135.91, NVIDIA’s current trading price substantially exceeds its DCF-calculated intrinsic value, highlighting a potential overvaluation. The margin of safety is -67.6%, suggesting limited upside for value-focused investors.

An Alternative Valuation: DCF Based on Free Cash Flow Using the traditional DCF approach with trailing twelve-month Free Cash Flow per Share (FCF), NVIDIA’s intrinsic value is estimated at $71.13. This valuation also implies overvaluation, with a margin of safety of -91.07%.

Key Takeaways for Investors The DCF model is a powerful tool for valuation, but its accuracy depends on the validity of assumptions. NVIDIA’s valuation showcases the importance of:

Screening for Opportunities: Utilize the GuruFocus All-in-One Screener to identify undervalued stocks. Focus on companies with high Predictability Ranks trading below their DCF intrinsic values, whether based on earnings or free cash flow. Such companies often present compelling opportunities for long-term investors.

While NVIDIA remains a market leader in innovation, its current valuation may warrant caution for investors seeking a margin of safety. The DCF analysis offers a systematic approach to assess whether the stock aligns with your investment criteria. For those looking to uncover undervalued gems, tools like the GuruFocus screener can be invaluable.