Hey guys, it's sasha today, i'm going to talk about nvidia, the company share price has skyrocketed and, as i'm recording this video they traded 818. The big question is: are nvidia shares still a buy? What should the target price be? Well, i'm going to share my view exactly on this with you, i'm going to walk you through some of the backgrounds. Some of my reasoning, because i think it's really important to understand how to value nvidia and then i'll, show you my dcf model and walk you through my valuation, but before i go any further, i have to make an important disclaimer. I am not a financial advisor.

I can't provide financial advice to you and if you do need financial advice, please make sure you go and seek the help of a suitably qualified professional. Everything in this video is just my personal opinion. All right. Let's move on to the important stuff, i'm gon na dive right into the details in a second, but first let me tell you the most important thing that you need to know just in case you don't want to know the details, so you don't really want to Understand the numbers, i think that nvidia shares are overvalued at the moment.

My target share price for nvidia is 770 and yesterday nvidia crossed well over that figure and today they're continuing that crazy run. So today i am liquidating my nvidia positions as a result of all of this. I've actually sold everything just now and by the end of the day, i'm not going to have a long or a short position on nvidia. So that's my as my disclaimer's done so now.

Let me share the details with you and explain why i am selling out of one of my favorite stocks. Nvidia is a company that invented the graphics processing unit, all the way back in 1999 and is still the market leader in gpu manufacturing in case you're, not aware, these are the computer components that perform relatively compute intensive tasks that are not well suited to traditional processor Architecture, so these are the sort of things that relates to graphics in a lot of case. Hence the name and they are able to support high demand games, render video compute, complex, mathematics and things like engineering. They can do a lot of different stuff and because of their ability to process all this complex computing and do math gpus have also become quite heavily used in crypto mining.

Now, games continue being the biggest sector for nvidia, with 49 of the business focused on rtx graphics cards and everything that comes along with them. But it's important to remember that, although the sector is called gaming, that is not the only use for these components. A growing number of professionals in different industries are using those rtx cards for other high intensive processing tasks in work. I, for example, use an rtx 3090 card in my computer under this table so that i can go and record this video then render it and do all the editing in between as well data centers are a fast growing.

Second: half of nvidia's business, accounting for 36 of their revenue, nvidia supplies, various chips for cloud computing, setups, ai and other enterprise applications. The other parts of the business are professional, visualization, automotive, but both are very small and both are actually reducing as proportion of the total. So we're not going to go into them in any kind of detail. Nvidia's share price has absolutely exploded over the last few months.

I talked about in video in a video on the 10th of february, and the share price back then was 590 and it tried it traded sideways for some time until about mid may, when the share price was at 560 and since then it has just gone berserk. Now there are a few reasons for it. The company has actually performed very strongly. Recently, nvidia's q1 2021 revenue was 84 higher than for the same quarter in 2020 and with lower operating expenses.

Their operating income was up 112, which is a phenomenal figure and in september 2020, nvidia agreed to buy arm from softbank now arm is a uk based processor design company, although they do design other kinds of computer chips as well and then on the 19th of july. Nvidia will have a four to one stock split, i'm going to get to arm in a second, so people got very excited because the share price has surged and video was until today, one of my largest holdings. But here i am not being very excited anymore. Let me tell you why the stock split itself is not really a factor.

A lot of people get very excited by these kind of things and often leads to some kind of short-term price surge where the numbers go up, but in the modern day when fractional shares exist - and you know, regular investors have access to to all of these stocks. It doesn't really affect anything in reality. It's more of a perception thing and let's now talk about the valuation, the company is doing very well. They generated a record 2.3 billion dollars in net income in the last quarter on a non-gaap basis and nvidia is expecting their revenue to increase to from 5.7 billion and q1 to 6.3 billion dollars in q2.

That's a big number, but for a somewhat mature company that has been stable and profitable for some time. A p e ratio of 95 or actually is higher now and a multiple of over 70 on the ebitda is, in my opinion, pretty expensive. But let's look in actual depth of the dcf model that i just put together remember this is just my personal model. It might be very wrong.

I might have just completely got everything wrong in it. Multiplied the wrong thing, so don't follow this. Make sure that if you are making your own investment decisions, you do your own homework anyway. I've put in some pretty racy assumptions here, just for the sake of argument.

I've put in a 75 rate of growth on ebitda for this year and then a 50 rated growth for 2022. It then tapers off after that. You might say that 75 percent is low, given the net income winner by over a hundred percent year on year. In the last quarter, but if you look at 2020 you'll notice that their revenue actually shot up in q3 and q4 versus the first half of the year and q4 2020 was only 12 percent lower than q1 2021.

Now i actually think the 75 assumption may even be optimistic. Nvidia's largest segment will have been relatively disproportionately affected in a positive way. Last year as people were in lockdown and sat at home, i have a feeling that demand for gaming tech was perhaps higher than it would otherwise have been, and that means potentially, we have sort of borrowed some of the growth from this year into the back end Of last year, if that makes any sense in any case, let's assume that these ambitions numbers actually play out. My ebitda goes up from 7.3 billion and 2020 all the way to 44.7 billion and 2026, and that's with the tapering.

That is a huge, huge number. I think this is going to be incredibly hard to hit even for a fast growing company like nvidia, then i'm assuming a standard 10 discount rate and giving nvidia another benefit of the doubt with a five percent long-term growth rate, seeing as they are a high-performing tech Business and i set the ebitda multiple to 15 at the end of 2026, after the growth rate has tapered off, which kind of works alright. For me, and with these assumptions, i get a target share price of about 755 dollars using the perpetual growth model or 804 on the ebitda multiple, so i'd probably set mine to around 770, because i think this industry is going to keep growing and i probably would Go somewhere in the middle and nvidia has this natural leadership position now. This price i have here does not take into account the arm deal.

So let's talk about the obvious, there's been a lot of news recently, because nvidia is expecting for the deal to be approved and the uk digital minister, oliver dowden has asked the uk competition authority to look into the deal, including its impact on uk's national security, which A lot of people didn't like very much. The competition and markets authority is going to produce a report by the 30th of july, so at the end of this month, which should then inform the government whether the deal is on and a lot of people have big reservations. Armed employees, 6 000 people in cambridge. In the united kingdom and the uk government is concerned that nvidia's acquisition of arm is part of a step to maybe kill the competitor and absorb them into their business.

Nvidia have produced a lot of guarantees and the government may make them produce even more as part of this approval process, but there is a huge risk. This deal will actually not go through. Industry analysts seem to agree, and there is a 10 to 30 percent likelihood placed by some really big industry analysts, but even if nvidia was to buy arm, how would that valuation change well, according to nvidia, the arm deal would increase their share price by 18, but Arm will cost nvidia 40 billion dollars, they've already paid 2 billion when they first agreed it and they're going to pay another 10 billion dollars in cash. So let's take that 10 billion out of their free cash flow in 2022..

I lose about 15 worth of share price roughly and then the remaining 30 billion of the deal are going to be paid as shares so that 21.5 billion on completion 5 billion later on another 1.5 billion in equity to arm employees. So this will dilute the shares. Interestingly, i talked yesterday why share dilutions are actually generally good for investors, and this is a good example. The company is actually funding the majority of that acquisition, which is a very big deal for them through shares, which is technically a good thing.

This is not really the reason why i'm deciding whether or not to invest in the business, but let's look at what it does to the particular dcf model that i have here. Nvidia's market cap is about 500 billion dollars, and so the 30 billion of new shares would very roughly be about six percent of the current market cap by the way, if nvidia's share price drops from this ridiculously high level of about 818. At the point when i sold that proportion will be even higher, but even at six percent, we're still eating away over forty dollars. So the share price drops to just below seven hundred dollars.

When i do that maths and even if they then get that 18 boost to the share price as a result of this deal going through, it's only going to go and raise it back to 826 dollars. You see you can see where i'm coming from now now. Um do have some challenges. Arm is not some kind of like magic bean.

That's going to do huge things it could, but it does have its own issues. Amd is very aggressively cutting into their enterprise cloud segment and i'm really not sure whether arm is going to grow at the sort of rates that i baked into the model for amd overall, because those are really big, the 75 and the 50. So if they don't they're, actually going to be dragging the rate of growth for the business down and that's going to affect the valuation in a negative way too. In any case, i am no longer seeing an upside for nvidia because of their huge surge recently, and even if there was an upside for me, it is just too small and i am selling all of my shares as a result.

Remember that's just my personal opinion. It's my personal decision: if you want to go, make your own decisions, you need to go and do your own research and make decisions based on what you think. If you like this video - and you found this useful, please help me out by hitting that like button. So that this video can reach more people, thank you so much for watching.

I really really appreciate it. As always i'll see you guys later.