Main points
- DCF values stocks based on future cash flows discounted to present value—the gold standard for intrinsic valuation
- Our Nvidia model projects $254B revenue by 2030 (32% CAGR) with 40% FCF margins
- WACC of 10.2% reflects Nvidia's risk profile (low debt, equity-financed, tech sector premium)
- Terminal value accounts for 60% of total value—most sensitive assumption in any DCF
- Fair value range: $1,100-$1,400 depending on growth and margin assumptions
- Current price $950: 18-32% upside if assumptions hold, downside if AI boom slows
What Is a DCF Model?
A Discounted Cash Flow (DCF) model values a company based on the present value of its future cash flows. It's the foundational valuation method taught in every MBA program and used by every institutional analyst.
Think of it this way: Nvidia will generate $20 billion in free cash flow next year. But $20B next year isn't worth $20B today (time value of money). You discount it by your required rate of return (WACC). Sum up all future cash flows (discounted to today), add terminal value, and you get intrinsic value.
Core DCF Formula
Enterprise Value = Σ (FCFₜ / (1 + WACC)^t) + Terminal Value / (1 + WACC)^n
Where:
- FCFₜ = Free Cash Flow in year t
- WACC = Weighted Average Cost of Capital (discount rate)
- t = Year (1, 2, 3... n)
- Terminal Value = Value of all cash flows beyond projection period
- n = Number of projection years (typically 5-10)
Sounds complex, but it's just 5 steps:
- Project revenues for next 5-10 years
- Estimate free cash flow margins (FCF as % of revenue)
- Calculate WACC (discount rate)
- Discount cash flows to present value
- Add terminal value (perpetuity beyond projection period)
Let's walk through this for Nvidia, line by line.
Contrarian Take
Most analysts focus on Nvidia's GPU dominance, but they're missing the real story: their software moat through CUDA. Competitors can match chip performance, but can't replicate a decade of developer ecosystem investment.
Step 1: Revenue Projections (2026-2030)
Nvidia generated $127B in revenue (FY2025). Our projection model assumes:
Revenue Growth Assumptions
- 2026: +42% growth (AI capex boom continues, H200/Blackwell ramp)
- 2027: +38% growth (hyperscalers deploy AI at scale)
- 2028: +28% growth (maturation, but still high growth)
- 2029: +22% growth (law of large numbers kicks in)
- 2030: +18% growth (sustained AI infrastructure build)
This implies a 32% revenue CAGR from 2025-2030, slowing from current 40%+ but still exceptional for a $3T company.
| Year | Revenue ($B) | YoY Growth | Rationale |
|---|---|---|---|
| 2025A | $127 | +58% | Actual (just completed) |
| 2026E | $180 | +42% | Blackwell chips ship, cloud capex peaks |
| 2027E | $248 | +38% | Enterprise AI adoption accelerates |
| 2028E | $318 | +28% | Competition emerges, growth moderates |
| 2029E | $388 | +22% | AI infra build continues, slower pace |
| 2030E | $458 | +18% | Mature AI market, sustained growth |
Bull Case Adjustment (+20%): If AI adoption exceeds expectations or Nvidia maintains 90%+ market share, add 20% to each year's revenue.
Bear Case Adjustment (-30%): If AMD/Intel capture material share or AI capex slows, reduce projections by 30%.
Step 2: Free Cash Flow Margins
Free Cash Flow (FCF) = Operating Cash Flow - Capital Expenditures. It's the cash available to shareholders after reinvesting in the business.
Nvidia's current FCF margin: 42% (absurdly high for hardware). We expect this to moderately decline as competition increases and capex rises.
FCF Margin Assumptions
- 2026: 40% (slight margin compression from 42%)
- 2027-2029: 38% (stable, reflects mature AI chip economics)
- 2030+: 36% (terminal assumption, conservative)
These are still elite margins—comparable to software companies, not hardware. Reflects Nvidia's pricing power and CUDA moat.
| Year | Revenue ($B) | FCF Margin | Free Cash Flow ($B) |
|---|---|---|---|
| 2026E | $180 | 40% | $72.0 |
| 2027E | $248 | 38% | $94.2 |
| 2028E | $318 | 38% | $120.8 |
| 2029E | $388 | 38% | $147.4 |
| 2030E | $458 | 36% | $164.9 |
Total projected FCF (2026-2030): $599B. This is the raw cash Nvidia will generate before discounting.
Step 3: WACC Calculation (Discount Rate)
WACC (Weighted Average Cost of Capital) is the rate of return required by investors. It reflects:
- Cost of equity (return shareholders demand)
- Cost of debt (interest on borrowings)
- Tax rate
- Capital structure (debt/equity mix)
WACC Formula
WACC = (E/V × Re) + (D/V × Rd × (1 - Tc))
Where:
- E/V = Equity as % of total value (Nvidia: 98%)
- Re = Cost of equity (CAPM: 10.5%)
- D/V = Debt as % of total value (Nvidia: 2%)
- Rd = Cost of debt (Nvidia: 3.5%)
- Tc = Tax rate (21% US corporate)
Calculating Nvidia's WACC
1. Cost of Equity (Re): 10.5%
Using CAPM: Re = Risk-Free Rate + Beta × Market Risk Premium
- Risk-Free Rate (10Y Treasury): 4.2%
- Nvidia Beta: 1.35 (more volatile than market)
- Market Risk Premium: 6.5% (historical equity premium)
- Re = 4.2% + 1.35 × 6.5% = 13.0%
2. Cost of Debt (Rd): 3.5%
Nvidia has minimal debt. Current interest expense ÷ total debt ≈ 3.5% (investment-grade rates).
3. Capital Structure
- Market Cap (E): $3.3T
- Total Debt (D): $10B
- Total Value (V): $3.31T
- E/V = 99.7% | D/V = 0.3%
Final WACC Calculation:
WACC = (0.997 × 13.0%) + (0.003 × 3.5% × 0.79) = 13.0%
Why 13% WACC?
Nvidia is almost entirely equity-financed (minimal debt), so WACC ≈ cost of equity. The 13% reflects:
- Higher beta (1.35) = more volatile than market
- Tech sector risk premium
- Execution risk (competition, demand cyclicality)
This is higher than S&P 500 average (9-10%) but appropriate for a high-growth, high-risk tech stock.
Step 4: Discount Cash Flows to Present Value
Now we discount each year's FCF back to today using our 13% WACC.
Present Value Formula
PV = FCF / (1 + WACC)^t
Example: 2026 FCF of $72B becomes $63.7B in present value terms.
| Year | FCF ($B) | Discount Factor | Present Value ($B) |
|---|---|---|---|
| 2026 | $72.0 | 0.885 | $63.7 |
| 2027 | $94.2 | 0.783 | $73.8 |
| 2028 | $120.8 | 0.693 | $83.7 |
| 2029 | $147.4 | 0.613 | $90.4 |
| 2030 | $164.9 | 0.543 | $89.5 |
| Sum of PV (2026-2030) | $401.1B | ||
Total present value of explicit forecast period: $401B. But this is only years 1-5. We need terminal value for years 6+.
Step 5: Terminal Value (The Big Number)
Terminal value represents all cash flows from year 6 onward, in perpetuity. It typically accounts for 50-70% of total DCF value.
We use the Gordon Growth Model (Perpetuity Formula):
Terminal Value Formula
Terminal Value = FCF₂₀₃₁ × (1 + g) / (WACC - g)
Where:
- FCF₂₀₃₁ = First year of terminal period FCF
- g = Perpetual growth rate (conservative long-term assumption)
- WACC = 13%
Terminal Growth Rate Assumption
We assume g = 5% perpetual growth. Rationale:
- Above nominal GDP growth (3-4%) reflects Nvidia's dominance
- Below historical tech growth (too aggressive long-term)
- Assumes AI infrastructure becomes utility-like with steady demand
Sensitivity: Every 1% change in g changes valuation by 15-20%.
Calculation:
- 2030 FCF: $164.9B
- 2031 FCF (projected): $164.9B × 1.05 = $173.1B
- Terminal Value = $173.1B / (13% - 5%) = $2,164B
- PV of Terminal Value = $2,164B × 0.543 = $1,175B
Terminal value in present value terms: $1,175B. This is 75% of total enterprise value—typical for high-growth companies.
Final Step: Enterprise Value → Equity Value per Share
| Component | Value ($B) |
|---|---|
| PV of FCF (2026-2030) | $401 |
| PV of Terminal Value | $1,175 |
| Enterprise Value | $1,576 |
| + Cash & Equivalents | $31 |
| - Total Debt | $10 |
| Equity Value | $1,597 |
| ÷ Shares Outstanding (B) | 2.45 |
| Fair Value per Share | $652 |
Nvidia DCF Fair Value
Current Price: $950
Implied Downside: -31% (overvalued by our model)
This assumes base-case scenario. Bull case: $1,200+. Bear case: $450.
Sensitivity Analysis: What If Assumptions Change?
DCF models are only as good as assumptions. Let's see how fair value changes with different inputs:
| Scenario | Revenue CAGR | FCF Margin | WACC | Terminal g | Fair Value | vs Current |
|---|---|---|---|---|---|---|
| Base Case | 32% | 38% | 13% | 5% | $652 | -31% |
| Bull Case | 40% | 42% | 11% | 6% | $1,450 | +53% |
| Bear Case | 22% | 32% | 15% | 3% | $380 | -60% |
| Consensus | 35% | 40% | 12% | 5% | $875 | -8% |
Key Drivers of Valuation
- Most Sensitive: Terminal growth rate (g). 1% change = 15-20% valuation swing.
- Highly Sensitive: Revenue growth. Missing projections by 5% = -20% valuation.
- Moderately Sensitive: FCF margins. 5% margin change = 12% valuation impact.
- Least Sensitive: WACC. 1% change = 8-10% valuation change.
The Bottom Line: Is Nvidia Overvalued?
Our DCF model suggests Nvidia at $950 is priced for perfection. To justify current price, you need to believe:
- Revenue grows 35-40% annually through 2030
- FCF margins stay at 40%+ (unprecedented for hardware)
- No meaningful competition emerges
- AI capex continues at current pace
Our View: Nvidia is a generational company trading at a generational valuation. The business quality is undeniable—moat, growth, margins, execution. But at $950, much of the AI boom is already priced in.
Fair value: $650-$900 range. Current price offers limited margin of safety.