The Investor Diary Entry #9: January 29, 2023
While I was reading the news today, one of the first articles that I read was one encouraging people to buy into Nvidia (NVDA) stock now. The article elaborates on the reasons why buy Nvidia stock today is because NASDAQ is still the weakest performing index amongst the major three indices. Therefore, people should buy now before NASDAQ soars along with Nvidia with it.
When I read articles analyzing a single stock, or articles that push people into taking an opportunity into particular stock names by the author, I wonder why authors would do such a thing.
Our point here is to analyze Nvidia and not the authors who encourage people to buy stocks through their articles.
I analyzed Nvidia last year several times. The first time was in April 2022 when the price was at $267, at the time the entity was also encouraging people to invest in Nvidia. Nvidia went to a 52-week low of $108.13.
Nvidia share price today stands at $203.65, and this entity releases an article today explaining why should people buy into Nvidia today and to take advantage of the hugely discounted prices available today.
Nvidia Is On My Watchlist
Yes Nvidia is on my watchlist and would love to own stocks in this semiconductor company. Actually, I am trying to get stocks in several companies in the semiconductor industry. I feel the industry once all the obstacles its facing today get resolved, it will boom.
Nvidia’s fundamentals are great; its revenue is growing, its earnings are growing, the free cashflow is growing, they can pay their long term liabilities in a little over 2.6 years with their free cashflow, they can pay all their long term liabilities immediately with their current assets. This is amazing!!
Before we move into the valuation figures which pose the major caveat for us to invest today in Nvidia, we would like to talk about the outstanding shares. Normally, investors who take the change in outstanding shares as one of the factors that they consider when they analyze a company, they look for a decrease in the number of outstanding shares. This means that the company is buying back shares which is a good thing but not all the time. The same goes for the opposite, when companies increase their outstanding shares, meaning that they are selling shares which a bad thing but not in all cases.
Nvidia’s Outstanding Shares And Valuation Figures
Nvidia is selling shares, which is normal and actually not considered to be a bad thing in their case. It is only in 2022 that they bought back some shares. Nvidia selling shares with their very high valuation figures is extremely normal, this means that they are selling their shares knowing that their share price is highly overvalued.
How highly overvalued? well, actually very high. Nvidia’s 5-year P/E is at 101.52 while their one-year P/E (TTM) is at 85.54. Their PS ratio is at 17.84 which is another indicator of their extremely high valuation.
Let us look at their 5-Year P/Free Cashflow which we will find at 109.57.
So, we established here that Nvidia is overvalued, but overvaluation is not always a showstopper to investing as some companies are known to deserve a premium based not only on their current fundamentals, but also on their future cashflows. Accordingly, let us move to look at how I will make assumptions about the future of Nvidia’s fundamentals to see what is a good price for me to invest in Nvidia.
Nvidia’s Target Price Analysis
Today I do not own any stocks in Nvidia. In my tracking sheet I have Nvidia stock target price at $52. Yesterday, I looked at my notifications and changed a lot of the target prices of many companies on my watchlist.
Now and here I will conduct Nvidia’s target price analysis and decide while writing this article what is Nvidia’s fair price for me – again for me – to invest in, and I will also mention where I will put my notification and why.
Let us start with my Assumptions
My Assumptions On Nvidia Corp.
I will use three numbers for my assumptions; Low, Medium and High
Revenue Growth: 10%, 12% and 14% for the next 7 years. This to say that Nvidia’s sales will increase 10% percent every year for the next 7 years, and 12% as a medium estimate and 14% as a high estimate.
Many would consider these assumptions as extremely conservative, but what I am trying to do is to buy the stock at a very favorable price for me to increase return on my investment as much as possible.
In the last four quarters Nvidia’s sales were 28.52B an increase of 17.7% from the previous four quarters. When I talk to myself, which I normally do when analysing a stock, I cannot assume that this will stay the same. As the sales number grow, the percentage will for sure drop, that is to say if sales kept on growing and that alone is very optimistic for any assumption.
Profit Margin: 18%, 20% and 22%, and the same percentages for the free cashflow (FCF) margins.
The P/E and the P/FCF I estimate to be at 14,16,18. Again remember that those are low, medium and high assumptions for the next 7 years.
In my analysis I use a software that allows me to put my desired rate of return which in this case I have put 12.5% for all levels.
If you are reading this and you are still introducing yourself to the investment world, well, don’t worry. I have been around for only one year, and during this year I introduced myself to all this which you can do very easily.
My Nvidia Stock Target Price
The above assumptions along with the desired rate of return came back with low, medium and high stock prices. In this case the result was as follows from high to low: $68.23, $51.18 and $37.79.
As I mentioned before, previously I have in my sheet put a target price of $52. Currently Nvidia stock price is at $203.65.
Yesterday I decided that I will not buy stocks which will not give me enough number shares. I have only small amounts of money to invest, but I would like to own stocks the likes of Nvidia. Therefore, I have put a notification for Nvidia at $20.
This does not mean that I will buy Nvidia stock at $20, this means that I will look at Nvidia when it reaches that price target.
Conclusion
Nvidia Corp is a great company with great fundamentals, but currently it is trading at very high valuations by all means. Even when it reaches levels where it could be undervalued, I might not be able to invest in it.
I will keep my notification there at $20 and play the fishing patience game. I will wait for it to reach my price. If it did, then great. I will look at it then, do a fresh analysis of the company and the stock, and then make a decision.
Tomorrow the market will open and I am planning to do something drastic with my portfolio, that is if the market stayed the same or above its current position.
The Investor
Sunday 29 January 2023
About The Author
I started to look into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second as a place that I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.
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