You will burn your hands, if you touch Nvidia at these prices

Nvidia is a great company, they operate in the most hyped sector of AI, and their profits are booming, almost up 10 fold most importantly the stock is up 600% in less than two years, but the question is not whether Nvidia is a great company they certainly are, rather is Nvidia a good buy at these prices and most importantly can they keep growing? 

Buissnies overview 

In short 2023 was the greatest year in Nvidia's history revenues were up 126% to 60 billion up from 26 billion $. Gros margin rose by 15.8 points and net income by almost 10 extend. 

The last quarter was even better revenues were up 26% and they beat the outlook by 2.1 billion $, the gross margin rose by another 2 points and net income was up 33%. The main driver. of growth was the data center segment which was up 404% year over year and 27% q/q. 

Their outlook for the first quarter of 2025 is that the revenues will expand by another 2 billion. 

Big risk 

One big risk with Nvidia is the concentration of revenue, as the company says in their 10k: 

Sales to one customer, Customer A, represented 13% of total revenue for fiscal year 2024, which was attributable to the Compute & Networking segment. 

One indirect customer which primarily purchases our products through system integrators and distributors, including through Customer A, is estimated to have represented approximately 19% of total revenue for the fiscal year 2024, attributable to the Compute & Networking segment. 

On the high end, 2 customers could represent 32% of the companies revenues and this presents a big risk: 

Can they keep growing? 

The most important question with Nvidia is not whether the company is great but whether it can keep growing. 

This question has been asked by many companies in history, but the answer may be unsatisfying "They grow until they don't". 

I am sure that Nvidia potentially has a few great quarters that can sustain the current stock price, but over the long term, we have to understand, that Nvidia is a cyclical company which means that there are great times but then bad times come and they always come. 

Nvidia's cyclicality is shown by their net income over time which is very cyclical and constantly goes up and down and I doubt that the same thing will not happen in the future. 

Valuation  

For the valuation, I used Nvidias free cash flow per share which is 10,83$. As always I used the required return of 10%, and I made 3 scenarios. But I must warn the growth rates are utterly unrealistic, I just used them to show you how ridiculous the valuation is: 

In the best case scenario, I made the assumption that Nvidia will grow 50% for the first five years of the calculation and for the second half 30% and I got the fair value of 1790,86$b per share which is almost double from here, but let's put things into perspective. For the scenario to happen Nvidia would need to earn 900 billion dollars per year in cash flow which is just absurd.  

OK but let's put the best-case scenario aside and look at the "normal case" 

 I made the assumption that Nvidia will grow 30% for the first five years of the calculation and for the second half 20% and I got the fair value of 650,59 $ per share, but for that to happen Nvidia would need to earn 300 billion $ per year in fcf which more 3 times more than apple earned in 2023, sure everything can happen but the question is: is it likely to happen? 

Conclusion  

Nvidia at the current level is absurdly overvalued and I would touch it with a 100-meter poll at the current levels. For me to make sense investing in Nvidia, the cycle must turn and their earnings will fall. The best thing to do is to never invest in cyclical companies at the top of the cycle.