| Year | EPS ($) | Growth | PV of EPS ($) |
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How This Tool Works
- To start we need to establish a reasonable discount factor for NVDA. It is a massive company with an established market lead in its area and clear visibility on orders months if not years ahead. However, it is a one sector company that has only been successful for a short period of time. Therefore, it should not trade for the same kind of return as an ultra robust company that has stood the test of time like McDonalds or Coca Cola. These trade at prices implying roughly 6% discount rate. NVDA probably belongs closer to something like an investment bank, where prices typically imply a 10% discount rate.
- As you can see NVDA's earnings have been growing at a phenomenal rate since the take off of AI in 2023. When doing a discounted cash flow model, which is what this is, you have to assume that earnings will normalise at some point. If not you will not get a sensible stock price and also it just doesn't make sense – if a company keeps growing at 50% a year forever, eventually the company will be the entire global economy!
- The user can choose to pick a normalisation period for earnings to get back to a more sustainable level, and what that level is, or you can just type in your best guess at earnings growth for each year if you want to do it manually.
- So, for example, if you think that NVDA's growth will normalise immediately, starting in 2027 then the stock looks slightly overpriced on these assumptions. If you believe the thesis that 2027 will be at least 25%, based on proportional hyperscaler earnings growth, then the stock looks 20–30% underpriced, and if you were to take Jensen's projections into the calculations (not insane given he's always delivered more than he guided so far) then the stock looks 50–100% underpriced.
Note: try entering your own assumptions first before toggling "Show Market Implied" to see what growth the current price implies.