Even with a $5 trillion valuation, UBS analysts say Nvidia is still undervalued. They base this view on their own valuation method.
Nvidia shares went up 1.6% in premarket trading on Thursday. However, the stock has mostly stayed flat over the past three months, with only small gains despite strong recent earnings.
UBS’s HOLT framework shows Nvidia’s growth profile is especially strong. The company is expected to deliver an 86% cash flow return on investment. This metric measures cash flow generated relative to invested capital and adjusts for inflation and accounting differences like capitalized R&D and off-balance-sheet leases.
UBS says Nvidia’s projected cash flow return puts it among only 30 companies worldwide with similar performance. Still, UBS points out that current market prices, based on estimates through 2028, suggest Nvidia’s margins will shrink and sales growth will slow a lot by 2029 or 2030. UBS thinks this outlook is too pessimistic.
Some worry that Nvidia depends too much on the current AI chip boom, which could slow down if AI investment drops or if big cloud companies start using their own custom chips instead of Nvidia’s. UBS says there is little sign of this happening so far. In fact, they note that profits across the wider data-center supply chain are expected to be higher than those of the cloud providers themselves this year.
UBS also points out that since ChatGPT launched, both the data-center supply chain and hyperscalers have done much better than the overall market. The supply chain has even outperformed the hyperscalers, despite some recent pressure over the summer.
Recent news shows that demand for Nvidia’s chips is still strong, even as more competitors enter the market. On Thursday, China’s Huawei Technologies said it will launch new AI chips over the next two years, taking advantage of rules that limit Nvidia’s sales of its top chips in China. Meanwhile, cloud company Nebius Group said it will raise rental prices for its Nvidia hardware, including older chips. This could help ease worries that Nvidia hardware might lose value over time.
