Ticker Symbols:- NVIDIA Corporation (NVDA) - $126.40, Apple Inc. (AAPL) - $213.25, Alphabet Inc. (GOOG) - $185.37, Amazon.com, Inc. (AMZN) - $193.61, Microsoft Corporation (MSFT) - $452.16, Meta Platforms, Inc. (META) - $513.12

The Common Take

A company's valuation is seen as a barometer of whether its considered a worthwhile investment or a pass. One of the first things, anyone interested in understanding the dynamics of the company in question being looked up. It's a shame that it's used as a singular reasoning for going into a company and we believe there is more to this concept than most care to realise and we have taken it upon ourselves to throw some nuggets to help better assist in the keen investors technical research endeavour.

In Simple Terms

Determining a business’ valuation is a process of generating a definitive economic value of a business. Valuation for a company can be calculated in a number of ways with the obvious and most common being its market capitalisation. Others include the times revenue method, the earnings multiplier method, the discounted cash flow method, the book value method and the liquidation method.

Understanding the right methodology is underpinned by the type of business. For publicly traded companies, the market capitalisation approach is usually the opted approach as it can be done by multiplying its stock price by its outstanding shares.

Private companies are a lot less transparent, just how we like them, so the usual suspect is the comparable company analysis that compares the valuation ratios of the private company to a comparable public company. However, a more technical methodology is the discounted cash flow approach which utilises the financial properties of the time-value of money by forecasting future free cash flow (FCF) and discounting each cash flow by a certain discount rate to calculate its present value. It's a more complicated approach than the comparative analysis and its implementation requires many more assumptions and some "bang on" numbers, like forecasting future operating cash flows, capital expenditures (CapEx), growth rates and an appropriate discount rate.

The Unlikely Predicament

From a financial standpoint, most investment decisions cannot be done before this analysis is completed. Understanding fair market value of a business and determining whether its overvalued or undervalued, educates potential investors on decisions that have long term implications.

Let's take the example of NVDA, which is currently valued at $3.062 Trillion and according to a hedge fund manager, will likely rise to over $6 Trillion by the end of 2024 making this stock a bargain investment at its current share price. But that is where we draw questions.

There are business fundamentals that need to be addressed for any business to attain a market cap of any amount but the methodology utilised by the said hedge fund manager from EMJ Capital, to project NVDA's performance is its previous average forward P/E multiple that has shot well above projections in the last 5 years and their belief is that by 2026, it will reach levels beyond that, due to the anticipated euphoria that, by then, will have a track record of over 5 years, going beyond the 50x a couple of times already.

What It Seeks To Achieve

This valuation is supposed to be the indicative pointer to a buy or sell signal or even assist in evaluating whether to buy or takeover a company, but the concern however is, doesn't this seem to be overvalued. We understand the product offerings of NVDA and its 80% market share of AI and Generative AI chips and GPUs, but fundamentals like tangible products and services, assets, R&D, are no longer the ‘be all & end all' of judging whether a business is in fact, worth as much as its share price.

Wisdom Prevails???

We currently have 6 companies with a trillion dollar valuation plus, with most of them already announcing AI strategies and releasing products catered to the new-ish ‘must invest’ sector. This trend is likely to get more trillions poured into it for the foreseeable future and we, as always seemingly last on any hype train, are left wondering, what about those valuations when fundamentals are called upon?