Is NVIDIA Overvalued? Comparing the Magnificent 7 (June 20, 2024, Pre-market)

Hi friends,

Today we are analysing the relative valuation of the Magnificent 7 stocks:

We evaluate their relative values through revenue and earning multiples, growth rates, and profitability margins.

This is part 1 of the analysis. In part 2, we will deploy technical analysis to assess each individual stock. Subscribe now to receive that in your inbox as soon as it’s published!

As usual, you can jump right into the individual stock section through the links below

• Enterprise value and revenue sizes

• EV/ Revenue vs Growth - Is NVDA justified?

• Margins - META & NVDA lead the top, TLSA bottom

• Earnings Multiples

• Growth Adjusted Multiples

• Conclusion & Part 2 Preview

Let’s have some fun!

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Is NVDA the new king?

While NVDA overtook MSFT in market cap yesterday, MSFT holds the lead in Enterprise Value (EV). (Note: this likely changes after the market open today!)

The difference between a company’s EV and market cap is net debt (cash). If a company has net debt, we add it to the market cap to reach the EV and vice versa. EV therefore represents the value of the company accounting for the debt versus cash situation of the company.

Although TSLA is a member of the Magnificent 7, its EV is only a faction of the larger peers.

It is therefore remarkable that Elon is the world’s richest man - he would be a trillionaire if TSLA is the same size as MSFT or NVDA.

In terms of revenue generation, AMZN is undoubtedly the king. Now look at the bottom right corner. NVDA is alongside TSLA, even though it has the highest market cap!

Does that mean NVDA is wildly overvalued?

Let’s find out.

EV/ Revenue vs Growth - Is NVDA justified?

We first compare the EV/ Revenue multiples of the Magnificent 7 companies versus both their historical and forward estimated growth.

_{(TTM stands for Trailing Twelve Months; NTM Stands for Next Twelve Months)}

NVDA’s high TTM EV/ Revenue multiple of 42x seems justified by its breakneck growth of 208%. If you look at where the orange line (growth) is versus the bar (EV/ Revenue multiple), NVDA looks fair in relative terms.

AAPL commands a 9x multiple with negative growth!

The only other company that appears fair in terms of TTM EV/ Revenue is AMZN. AMZN grew 12.5% in the past year despite having the largest revenue base.

If we look at the forward valuations, NTM EV/ Revenue vs forward 2-year annualised growth, NVDA still appears fair at 25x for 61% growth.

AMZN seems cheap. GOOGL, META and TSLA are more or less in line. MSFT and AAPL appear expensive.

But this is not the whole story.

Margins - META & NVDA lead the top, TLSA bottom

Not all revenues are equal. Some businesses enjoy a huge margin advantage over others. Typically, software companies enjoy a much higher gross margin than hardware companies.

_{(EBITDA stands for Earnings before interest, tax, depreciation, and appreciation; FCF Stands for free cash flows)}

In terms of profitability, META, NVDA and MSFT are the best performing across gross, EBITDA, and free cash flow margins.

AAPL has the second lowest gross margin but its 26% free cash flow margin is not to be sniffed at. This partially explains the revenue multiple

Compared with MSFT, GOOGL ‘s profitability metrics are about 10% worse across board, again explaining why MSFT’s revenue multiple is more than double.

Finally, TSLA is not having much fun on the profitability front. Its gross margin is still in the teens and barely producing any free cash flows.

Earnings Multiples

Next up, we look at the “profit” multiples, EV/ EBITDA and P/E.

EBITDA excludes interest, tax, depreciation, and amortisations, thereby focusing on the core business performance. We can see that NVDA’s EV/ EBITDA multiple of just under 40x is justified by its 2-year forwards annualised growth estimate.

META and AMZN also look fairly valued compared with others. Meanwhile, TSLA, AAPL, and MSFT appear expensive.

In terms of PE, a more popular measure that includes non-cashflow items such as depreciation, NVDA and AMZN still loo most favourable, while GOOGL and META both look attractive.

Again, MSFT, AAPL, and TLSA appear very expensive given their estimated 2-year forward EPS growth rate.

Growth adjusted multiples - putting it together

Finally, we put together both the revenue and P/E multiples divided by their growth rates. This is the popular concept of “PEG”, where the common wisdom suggests that PEG < or = 1 is a fair price to pay for a stock.

Here, NVDA has a PEG of 0.71 (i.e. cheap), while GOOGL, AMZN, META are just around a PEG of 1. MSFT, AAPL (off the chart), and TSLA (off the chart) all have a PEG >2.

Conclusion

Relative to its peers, NVDA’s valuation seems justified. Moreover, among the Magnificent 7, META and AMZN also look attractive.

However, there is an important caveat: the growth rates based on analyst estimates for the next 2 years may never be realised. There is certainly a VERY hot AI sentiment right now, with the market full of optimism about the future growth of AI.

In a market downturn, analysts often revise down their future estimates, at the same time as the stocks fall. How helpful.

Part 2 Preview

In part 2, we will bring our technical chart analysis as well as the historical valuations of each individual stock. This will provide further clarity on the opportunities at hand.

Subscribe now to receive Part 2!

A quick word from the author

I really appreciate your support for this newsletter.

Please feel free to share any suggestions or comments, either directly through email or in the comment section.

— Yimin

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

References

1. Company data are from Koyfin

2. All charts by YX Insights.