Nvidia: AI’s Core Engine, But Growth May Stabilize

🏿 Business Overview

Nvidia is a global technology company best known for its powerful graphics processors and growing leadership in artificial intelligence. It operates through two main segments:

• Graphics, used in gaming, professional visualization, and design.
• Compute & Networking, powering AI, data centers, and autonomous vehicles.

Its GPUs—such as the H100—and the CUDA software platform have made Nvidia the foundation of modern AI infrastructure. The company is also expanding beyond hardware into software and full AI platforms, deepening its ecosystem and increasing customer dependence.

Nvidia has grown rapidly due to surging AI demand. However, as the industry matures and competition intensifies, growth and profitability may begin to normalize.

💵Revenue Exposure & Diversification

The revenues are geographically diversified over the following geographic segments:

• United States: 46.94%
  • 1-Year Revenue Growth = 127.16% (5Y CAGR: 133.32%)
• Singapore: 18.15%
  • 1-Year Revenue Growth = 246.71%
• Taiwan: 15.77%
  • 1-Year Revenue Growth = 53.47% (5Y CAGR: 46.73%)
• China (including Hong Kong): 13.11%
  • 1-Year Revenue Growth = 66.00% (5Y CAGR: 44.34%)
• Other: 6.03%
  • 1-Year Revenue Growth = 130.67% (5Y CAGR: 67.40%)

Its also diversified across several business segments:

• Data Center - Compute: 78.31%
  • 1-Year Revenue Growth = 162.38% (5Y CAGR: 114.76%)
  • Estimated Operating Margin: ~66-73%
• Data Center - Networking: 9.95%
  • 1-Year Revenue Growth = 51.49% (5Y CAGR: 77.09%)
  • Estimated Operating Margin: ~66-73%
• Gaming: 8.70%
  • 1-Year Revenue Growth = 8.64% (5Y CAGR: 15.52%)
  • Estimated Operating Margin: ~32-37%
• Professional Visualization: 1.44%
  • 1-Year Revenue Growth = 20.93% (5Y CAGR: 9.15%)
  • Estimated Operating Margin: ~32-37%
• Automotive: 1.30%
  • 1-Year Revenue Growth = 55.27% (5Y CAGR: 19.33%)
  • Estimated Operating Margin: ~32-37%
• OEM and Other: 0.30%
  • 1-Year Revenue Growth = 27.12% (5Y CAGR: -5.09%)
  • Estimated Operating Margin: ~32-37%

💬Nvidia's Narrative

"Nvidia’s fundamentals remain exceptionally strong, underpinned by leadership in AI infrastructure and a widening software ecosystem. However, both revenue growth and margins are likely to stabilize over the coming years as the market matures, competition intensifies, and the real-world impact of AI becomes more grounded and measurable."

🎯Key Insights & Assumptions

• Revenue Growth: 5-Year (CAGR): 64.24% | Last Year: 114.20%
  • Expected to be around ~55% next year and then stabilize around ~20-22% during the next couple of years.
• Free Cash Flow Growth: 5-Year (CAGR): 70.12% | Last Year: 125.21%
  • Expected to be in line with the revenues, around ~55-60% next year and then stabilize around ~25-30% during the next couple of years.
• Operating Margin: 5-Year Avg: 40.44% | Last Year: 62.42%
  • Projected to remain around the ~60-65% during the next couple of years, transitioning graudally to around ~45% as the AI market matures and possible competitors appear.
• Return on Invested Capital (ROIC): 5-Year Avg: 57.91% | Last Year: 153.25%
  • Expected to stabilize around the ~60% mark.

📈Business Valuation

To assess Nvidia's intrinsic value, we'll use these valuation methods:

• Discounted Cash Flow (DCF) - Intrinsic value is estimated by projecting Nvidia free cash flows over the next 10 years and discounting them to present value.
• EPS Growth Projections - uses analyst consensus forecasts for EPS over 5 years, applying scenario-based PE multiples to calculate value.

Discounted Cash Flow (Weight: 80%)

📌 Key Assumptions

• Revenue Growth (CAGR) is estimated to be around 55% in Year 1, 22% in Years 2-5 , tapering to 4.21% (risk-free rate) in perpetuity.
• Operating Margin decreasing gradually to ~45% as AI market becomes more measurable and new competitors appear, reducing princing power.
• Cost Of Capital at ~11.41% considering its global revenue exposure, business segments and Moody's credit rating of Aa2.
• ROIC terminal value will be set to be maintained around ~60% given its history and the maturity and efficiency of its systems.

💰 Fair Value Estimate

Based on the DCF model, Nvidia's estimated fair value is $138.61, suggesting that currently the stock may be overvalued.

EPS Growth Projections (Weight: 20%)

📌 Key Assumptions

• EPS growth projections are estimated using the analysts consensus for the upcoming years, so it should start around ~40% and gradually tapering to around ~12% growth.
• Required Return used was ~11.41% based on the calculated WACC used during the DCF valuation.
• The P/E ratios used for the three cenarios were made using the assumption that even in a Bear case Nvidia will be priced higher than its industry (~25.20) and its P/E should stabilize a little bit allowing for a maximum of ~45.
• The Weights and the emphasis on the higher end cenarios (Base and Bull) reflect my narrative that Nvidia will maintain its leadership position on the AI revolution and so it will be priced higher by investors even if priced a little bit conservetely from the current values.

💰 Fair Value Estimate

Based on this method, Nvidia's estimated fair value is $192.30, suggesting that currently the stock may be trading near fair value.

✍️Summary

Averaging the two valuation methods by their assigned weights, it's estimated that the fair value for Nvidia is $149.35.

Nvidia appears to be trading at a premium to its intrinsic value. While current valuations are high, the company’s exceptional quality, strong market position, and exposure to AI-driven growth make it a compelling long-term holding for investors seeking leadership in the next wave of technology.