Nvidia’s (NASDAQ: NVDA) road ahead can be bumpy as the company plays the long game with the Metaverse strategy
NVIDIA Corporation (NASDAQ: NVDA) is in an enviable position to supply components to some of the world’s fastest growing industries, including games, cloud computing, artificial intelligence, visualization and cryptocurrency mining. . With a market value of $ 538 billion, it is the 11th most listed company in the US markets and on the verge of overtaking TSMC (NYSE: TSM) as the world’s most valuable semiconductor manufacturer.
However, when a company is the size of Nvidia, it becomes more difficult to sustain the growth rates that got it to this size in the first place. Among the global mega-cap companies, Nvidia has one of the richest valuations, aside from maybe You’re here (Nasdaq: TSLA).
Nvidia’s price-to-earnings (or “P / E”) ratio of 74x is second behind Tesla among the top 20 companies. And Nvidia’s 24x price-to-sales (or “P / S”) ratio is the highest of this group of companies. These metrics suggest that Nvidia and Tesla have the most future growth factored into their valuations among mega-cap stocks.
See our latest review for NVIDIA
What is Nvidia worth?
When we estimate Nvidia’s intrinsic value using analyst forecasts, we come up with a value of $ 107.75, which implies that the stock is overvalued by around 103%. This estimate is calculated using free cash flow in 2 steps and you can see the full calculation here.
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. Both of these things can and will likely change over time. The value of 107 USD is therefore only an estimate based on current forecasts.
Enter the metaverse
Clearly, the market believes that NVIDIA may grow faster than current forecasts suggest. One of the reasons for this is the metaverse and Nvidia’s efforts to accelerate growth in the industries it supplies.
The metaverse is one or more virtual, 3D, digital worlds. Currently, the metaverse is mostly limited to games like Fortnite and Minecraft. But in the future, the Metaverse promises to be a place to work and play. It will see the full realization of the potential of virtual and augmented reality, and merge the real world with the Internet.
Creating the metaverse requires cloud computing, artificial intelligence, and virtual and augmented reality – the same industries and technologies that make up some of Nvidia’s key markets. Nvidia CEO Jensen Huang believes the economy of the metaverse will be more important than the economy of the physical world, although he tends to use the term omniverse rather than metaverse.
A key part of Nvidia’s growth strategy is providing the tools to make it a reality. These efforts are part of the Nvidia Omniverse, a real-time simulation and collaboration platform.
There are countless applications where businesses can use any combination of AR, VR, and AI to increase efficiency, reduce costs, and collaborate. The applications for industries such as animation, gaming, architecture and automotive design are evident. But there are applications in countless other industries as well.
To create the platform, Nvidia partnered with a number of other companies, including Adobe, Autodesk, Blender, and Pixar. This means that Nvidia’s Omniverse is helping users of all of these products make the metaverse a reality, thereby increasing the size of Nvidia’s market.
If Jensen Huang’s prediction that the metaverse will be a bigger economy than the current physical economy comes any closer to reality, Nvidia will be one of its main suppliers, if not its largest supplier. This makes a compelling investment case – but the metaverse is far from a large-scale reality, and stocks aren’t moving in a straight line.
The semiconductor industry is also cyclical, and earnings tend to be erratic. Add to that the fact that Nvidia is trading at a substantial premium, and there is the potential for a lot of volatility going forward.
We recently pointed out that insider trading suggests that Nvidia may be near a peak. We could see many corrections of varying magnitude going forward – this is the nature of companies that persistently trade at high valuations. Watching insider activities can be a good way to manage your own expectations. Insider activity and ownership distribution are included in our free Nvidia analysis.
Richard Bowman, analyst at Simply Wall St, and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.
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