NVIDIA's (NVDA) rapid rise in 2023 has led some investors to mistakenly believe that the company is significantly overvalued. If we take into account the company's quality, high barriers to entry, and competitive advantages (which should translate into strong earnings growth this year), then the idea that it's overvalued is a mistake.

01Misunderstanding 1: Being considered overvalued

The first misunderstanding about NVIDIA - the so-called overvaluation:


In 2022, Nvidia's P/E ratio reached extremely high levels, but in hindsight, this was reasonable. Although Nvidia's stock price has soared, high earnings growth over the past year has led to a decline in the price-to-earnings ratio. Nvidia is definitely not overvalued in terms of growth opportunities and valuation.

I think a lot of people think Nvidia stock is overvalued because it's gone up so much. But this growth is based on incredible competitive advantages and strong metrics. If people think Nvidia isFor stocks in cyclical industries, when they predict that the cycle has peaked and they think earnings are going to decline, I can understand their argument. Although in my opinion the end of the cycle is not yet here.

Companies including Dell, Lenovo and Hewlett Packard Enterprise are still waiting for H100 shipments, with wait times ranging from 36 weeks to 52 weeks. The demand for Nvidia's products is still greater than what they can deliver in a timely manner. Therefore, I don't think Nvidia's earnings will decline significantly in the next few years.

Furthermore, Nvidia's management does know how to anticipate and position itself for future trends. They benefited from the hype around generative AI, and have also positioned themselves to benefit from fully self-driving (“FSD”) cars and the Metaverse. These may all be drivers of huge revenue for Nvidia in the future.

When the FSD field breaks through and becomes mass market, NVIDIA DRIVE and its AI cockpit solution may be very valuable, and when the Metaverse becomes a reality, who will produce the best GPU for the most realistic graphics? Nvidia is also working with Foxconn in the robotics market, which is another incredibly exciting future market.


If we want to understand current pricing, we can perform a reverse discounted cash flow ("DCF") analysis using the following assumptions:

After dilutionEarnings per share (TTM): 7.59

USD discount rate: 10%

Terminal multiplier: 35x.

What we then get is that the stock's current price implies an EPS growth rate of 19% over the next 10 years. NVIDIA's 3-year compound growth rate: 70.49%, 5-year compound growth rate: 32.33%, and 10-year compound growth rate: 44.34% are all much higher than this. This again suggests that the stock is not overvalued, and may even be the opposite.

02Misunderstanding 2: Good luck

The second misunderstanding - this is just hype, Nvidia just got lucky, and the product is not that great:

Intel CEO Patrick Gelsinger said that Nvidia was "very lucky" that Intel did not continue the Larrabee project and Nvidia benefited from it. But this is another great example of Nvidia seeing a trend before most other companies.

A huge competitive advantage, which is a testament to the quality of Nvidia's management.

If we look at the GPU market, Nvidia and AMD are the two giants, while Intel is relatively lagging behind. Nvidia tries to lock customers into its ecosystem, while AMD's approach is to make its products available to as many customers as possible. Thanks to innovations like ray tracing, UpscalingDLSS, and G-Sync, Nvidia is able to dominate benchmarks and justify to customers the premium they pay for their products. Because Nvidia is far ahead in software, especially its CUDA, which has demonstrated its biggest competitive advantage at present.

In terms of top performance, the GeForce RTX 4090 is currently unmatched. AMD's Radeon RX7900XTX ranks second, but is relatively behind. AMD's advantage is more in terms of price/performance, as the RX7800XT is probably the best mid-range GPU around, and perhaps another advantage that may be important in the future is that AMD's products are generally more energy efficient. Far behind these two in this market is Intel's ARCA770.

The RTX5090 may move to an MCM design and may be 2.5 times faster than the 4090. Therefore, the Blackwell generation, which is expected to be launched in late 2024 or early 2025, may cause quite a stir. The combination of 5Blackwell chips with GDDR7 memory and TSMC 3nm chips does sound interesting. But as CEO Jensen Huang said, Nvidia is more than just a GPU company, because Nvidia is more about solving complex problems in a shorter time, and they just never changed the name of the market that Nvidia and other companies participate in.

NVIDIA's current cash and ST investments are US$18.3 billion, while debt is only US$9.8 billion. Therefore, the debt can be easily repaid,The balance sheet is rock solid. Furthermore, their TTMFree cash flow ("FCF") was $14.0 billion, while stock-based compensation (SBC) was only $3.293 billion, so SBC adjusted FCF was approximately $10.7 billion.


NVIDIA’s lowest price in the past 5 yearsROIC is just over 12%, with the average being close to 22%+. According to my calculations, with a cost of debt of 5% and a cost of equity of 9.3%,WACC is about 9%. Therefore, NVIDIA's current ROIC-WACC difference is 52%-9%=43%. The spread is incredible for a company that's growing so quickly, generating positive free cash flow, and not being over-leveraged.


Furthermore, Nvidia doesn't have an SBC problem, as its shares outstanding have actually declined over the past three years. With management compensation aligned with shareholder interests, its free cash flow is likely to be used for more in the coming years.Stock buybacks.


Performance targets are based on non-GAAPoperating income andTotal shareholder return, in my opinion, those are two goals that benefit shareholders. Although I would prefer to see GAAP rather than non-GAAP operating income because I prefer unadjusted numbers as a forward reference.

Nvidia is poised for incredible growth over the next few years because its GPUs are important to customers if they want to stay ahead of the curve. If these chips weren't so important, there wouldn't be trade restrictions. This is why I believe Nvidia and AMD will be bigger and more important companies in five years than they are today.

Of course, Nvidia may see some slowdown this year after its meteoric rise, but the company is positioned very, very well over the long term and the stock should follow the company's continued success.