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how much should Nvidia stock (Nasdaq: NVDA) rise or fall in coming years? | Long term price range for NVDA
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This report utilizes data to ascertain the future best-case, base-case, and worst-case in terms of the price range for Nvidia's stock for 2022-2032. Data from the stock's performance and the performance of the segment has been utilized for this purpose.
Methodology
For this analysis, the earnings multiple method, specifically, the price-earnings (P/E) method, is deployed to assess a range for the stock grounded in data, and not speculative fervor, which may be driven by irrational risk-taking.
The average P/E ratio of the stock, based on data for the last 15 years, is used, in conjunction with the mean of the average P/E ratios for the four most comparable companies in the space, i.e., AMD, Intel, Qualcomm, and Broadcom (the average of the ratio for the four companies is calculated first, and the average of the four averages is calculated). 70% weight has been given to the historic P/E ratio of NVDA, and 30 to the average of the four comparable companies. Ratios are also scenario adjusted.
The growth rate for the EPS used in the calculation is the long-term (16 years) growth rate (geometric mean) of the stock. In the assessment, the growth rate of 93% p.a., is used for the first two years, the sectors growth rate of 14.3% p.a., is used for the next five years (till 2028), and a reduced growth rate of 10% is used thereafter, due to the possibility of maturity.
The best-case, base-case, and worst-case stock price range is calculated based on a 98% confidence interval calculated of the P/E ratio of the stock with a weight of 70%, and 30% weight in each scenario is given to the sector calculated P/E.
The confidence interval of the sector value (98%) is also calculated and is used in the higher end of this range, the best-case scenario, the lowest value of the range is used in the worst-case scenario, i.e., the range of the sector price-to-earnings ratio is 56.4 to -5.63, the 20% weight used in the best-case is 56.4, and -5.63 is used in the worst-case, the average value of 23.4 is used for the 20 percent weight in the base-case scenario.
All data and calculations are included at the end of the report.
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So, what does the data reveal?
The calculations reveal the following realistic range for Nvidia's (NASDAQ: NVDA) stock price (price analysis):
The long-term EPS growth rate in the calculation equates to 27% p.a., while the long-term average growth rate, as per historical performance, stands at 93% p.a.
Application
The range presented in this report can be used as a guide for evaluating whether the stock is deviating significantly from a realistic range that it should observe. The range presented here can also be seen as a range of fundamental value, and when the stock price moves out of the range presented here, investors can evaluate the possibility of short-selling or buying the stock.
It can also be used to determine the level of irrationality; positive irrationality, i.e., a sanguine attitude by market participants, or a negative irrationality or pessimism by the market.
For example, if the stock, long-term, experiences a growth rate very much in the range of the rate used in the calculations in this report, & the company hasn't created a product or technology that would exponentially increase EPS, but the share price moves significantly out of the range, we should evaluate the possibility of the stock being irrationally overvalued, the same applies for the reduction of price beyond the range discussed, that is not backed by factors that are very likely to reduce earnings considerably.
Another point that must be noted here is that other factors may impact the multiples that investors are willing to pay for stocks, most notably, interest rates, overall economic growth, and technological advances are most relevant.
For example, if interest rates stay depressed long-term, or approach zero or negative rates, arguably, investors are likely to increase the multiples they are willing to pay for stocks in such an environment, the higher end of the range would then become a more relevant baseline.
This is because the discount rates for equity, through which the value of equity is calculated by using models such as the capital asset pricing model (CAPM), would be lowered due to interest rates staying low or negative. Lower interest rates can cause an upward revaluation of equities, and that can increase equity prices; due to such a reduction in the discount rates, more investors may be attracted towards investing in equity, which can also lead to a further increase in multiples.
Of course, the opposite would be true if interest rates rise; in such a scenario, the lower end of the range would be more relevant.
Overall positive economic environment may also aid in increasing sales for the company, which would lead to an increase in EPS, and if such positive economic condition is expected to persist for a few years, the upper end of the range would be more relevant. On the other hand, if the economic environment is likely to be negative, or is expected to stay depressed for the next few years, the lower end of the range would become more relevant.
Technological innovation is another factor that we must consider. If technological improvement/development stagnates or is likely to stagnate in the next few periods, investors may not be willing to pay high multiples. If this is not likely to be the case, or if Nvidia is likely to create, or is seen to be moving towards creating a new technology that would revolutionize the industry, then, of course, investors are likely to pay higher multiples (see report on creative destruction process for further understanding).
Lastly, in periods of high volatility, options traders or day traders can also use the range provided in this report for estimating the 'swings in stock price,' or to evaluate the extent of a possible downward or upward movement.
Data
Analysis of PE-ratio multiple of comparable companies (excel file):
Nvda PE-&-EPS calculations (excel file):