What do I have to believe?

What do I have to believe for “x” to be true? It’s a question that could lead in a million different directions (religion, politics, education, sports, etc). In this case, we won’t focus on any of those massive topics; rather, we’ll focus on NVIDIA (NVDA), the most valuable company in the world. It’s challenging to grasp the sheer scale of NVIDIA at present. As of this writing, the company’s market capitalization has surpassed the staggering $4 trillion mark, currently standing at approximately $ 4.2 trillion. A number that big needs context to feel real, so let’s try a few comparisons.

At that valuation, NVIDIA is larger than the entire economy (measured by GDP) of India, Japan, and the United Kingdom. Or, to put it another way, NVIDIA’s market cap is only smaller than the U.S., Chinese, and German economies.
It’s worth more than the combined equity markets of five G7 nations (Italy, Germany, France, Canada, and the U.K.)
In the corporate world, their shadow looms even larger. NVIDIA is bigger than almost half of the S&P 500 combined. It is roughly equivalent to six Walmart’s (WMT), 38 Nike’s (NKE), or 94 Ford’s (F).
Finally, from a diversification standpoint, NVIDIA now accounts for approximately 7.5% of the total S&P 500, a substantial proportion for what has historically been a well-diversified index (in 2010, the largest constituent was ExxonMobil at 3.2%).

This isn’t just a successful company; it’s an economic force of nature. But when a company’s valuation reaches a scale that rivals (and surpasses) nations, it begs a critical question for any investor: What do I have to believe for NVIDIA’s valuation to be true?

A Quick Look at Valuation Multiples

Before diving deep, we can use a few simple metrics to take the market’s temperature. The most common is the Price-to-Earnings (P/E) ratio, which tells you how much you’re paying for one dollar of the company’s annual profit. Based on the trailing twelve months (TTM), earnings were $3.54 per share, which translates to a P/E ratio of approximately 48. So investors are paying $48 for every $1 of earnings. Okay, but we know markets are forward-looking, so the fiscal year 2026 earnings estimate is $4.48 per share, which implies a “Forward P/E” of approximately 38. While lower than its historical multiples, this is still more than double the S&P 500’s long-term average of around 16 and considerably higher than the sector (IT) median P/E, which is 23 (both TTM and Forward). A P/E this high is a clear signal that investors expect its earnings to continue growing at an explosive rate.

Another useful metric is the Price-to-Sales (P/S) ratio, which compares the stock price to the company’s revenue. This is often used for growth companies where profits may not yet be stable (NVIDIA happens to be a growth company with explosive profits as well). For the last twelve months, the P/S is sitting at 25, while for the upcoming fiscal year, NVIDIA has a “FWD Price/Sales” ratio of 20. What is the sector median P/S, you ask? Just 3.2. This indicates that the market places an immense value on every dollar of its sales, anticipating that those sales will be incredibly profitable and continue to multiply for years to come.

Now, these multiples are just a snapshot. They’re not looking into the distant future, so it doesn’t tell us the whole story. They do tell us that the market is pricing in a future of near-perfect execution and continued dominance, but they don’t tell us what that future needs to look like. For that, we need to build a model.

What Story Do the Numbers Tell?

To truly understand what’s baked into NVIDIA’s $170 stock price, we can use a Discounted Cash Flow (DCF) model. It sounds complex, but the idea is simple: a company’s value today is the sum of all the cash it’s expected to generate in the future, with that future cash discounted back to its present-day value. It forces us to move beyond hype, emotion, speculation, and put concrete assumptions on paper.

Using the latest consensus estimates from Wall Street for NVIDIA’s revenue, we can build a model. For this exercise, we will use two critical assumptions:

Discount Rate: This represents our required annual return for assuming the risk of owning the stock. Let’s assume that’s 10%
Terminal Growth Rate: This is the rate we assume NVIDIA’s cash flows will grow forever after the initial 10-year forecast period. Let’s assume 5%.

***It’s worth noting that both of these metrics have a significant impact on the overall analysis.

And while there are almost endless additional assumptions regarding margin rates, expenses, capex, etc., for our purposes, we will keep those in line with recent history.

Here is a simplified look at the cash flow projections based on the provided analyst estimates:

Running these numbers through a DCF model, we arrive at an estimated intrinsic value of approximately $150 per share.

So, what does this tell us? The fact that our DCF value is below the current market price of $170 suggests the market is pricing the stock with even more optimistic assumptions. To justify today’s price, you need to believe in a specific future.

Here’s the story you need to subscribe to:

Explosive, Uninterrupted Growth: You need to believe that the consensus Wall Street forecasts, which project revenue growing from $206B to over $670B in the next decade, are not only achievable but beatable. This implies the AI revolution is still in its early innings and that NVIDIA will maintain its commanding lead.
Sustained, Sky-High Profitability: The model assumes NVIDIA will maintain its incredible net profit margins of over 50%. This means you believe that competition from AMD, Intel, and major customers developing their own chips (like Google, Amazon, and Microsoft) will fail to make a significant dent in NVIDIA’s pricing power.
A New Normal of Perpetual Growth: The 5% terminal growth rate is a crucial piece of the puzzle. Believing in this number means you believe that even after a decade of hyper-growth, NVIDIA will settle into a “mature” growth rate that is nearly double that of the global economy, and that it will do so forever.

The Art Amidst the Science

Here’s the most important takeaway. The DCF value of $150 isn’t the “right” answer. It’s simply the output from estimated inputs. The provided analyst estimates are, by definition, estimates. What we didn’t show, but is behind the scenes, is that for fiscal year 2028, some analysts think revenue could be as high as $407B, while others see it as low as $242B. That’s a massive range of potential outcomes.

The real power of this exercise isn’t to get a precise price target, but to understand the narrative embedded in the stock price. The model is a healthy antidote to emotion because it forces us to ask the hard questions. Are these assumptions reasonable? What could go wrong? What happens if growth slows sooner than expected?

In investing, as in life, it’s wise to control the controllables. You can’t predict NVIDIA’s next earnings report, nor can you predict the next technological breakthrough. However, you can control your behavior and ensure that you ask the proper questions before jumping on a bandwagon.

Regardless, the market’s verdict is clear. It expects a future of unprecedented, near-flawless execution for years to come. The question every investor must answer for themselves is simply, “Do I believe it?”

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Markets / Economy

It was jobs week again, with more signs of weakness. However, the biggest news of the week was a win for Alphabet, which won its antitrust lawsuit. The S&P finished the week up 0.3%, the Nasdaq was up 1.1%, and the small-cap Russell 2000 was up 1.0%.
The ISM U.S. Manufacturing PMI increased to 48.7 in August from 48.0 in July, though it fell short of market expectations of 49.0. The index signaled a sixth straight month of contraction.
Job openings in the U.S. fell by 176K to 7.18M in July, the lowest level since September 2024 and well below market expectations of 7.4M.
U.S. Nonfarm payrolls rose by 22K in August, well below an upwardly revised 79K in July and market forecasts of 75K, underscoring signs of a cooling labor market.

Stocks

U.S. equities were in positive territory. Communication Services and Consumer Discretionary were the top performers, while Energy and Financials lagged. Value stocks led growth stocks, and small caps beat large caps.
International equities closed higher for the week. Emerging markets fared better than developed markets.

Bonds

The 10-year Treasury bond yield decreased 14 basis points to 4.09% during the week.
Global bond markets were in positive territory this week.
Corporate bonds led for the week, followed by government bonds and high-yield bonds.