My Secret Weapon for Calling the Top in NVDA

Hi, this is David Trainer. I'm here to show you how I used a secret weapon to call the top for Nvidia and to let you know that there's still a lot of downside risk. Now, I called the top back on August 26th on Chuck Jaffe's Money Life Show. I flat out said, hey, I'm calling the top in Nvidia today. But I think there's still a great deal more risk in the stock, a lot of downside risk. And I'm going to show you how there's more downside risk, and I'm going to show you using that same exact secret weapon that we talked about. Now, this video is in tandem with a report I published that provides all these details as well. One of the things it points out is that this concept behind my secret weapon has been around for a long time. It first started really with Michael Mauboussin and Paul Johnson in the seminal paper they wrote, back in 1997 called the Competitive Advantage Period or the Neglected Value Driver. It went on to be a book that Michael Mauboussin wrote with Al Rappaport, looking to give people a fundamentally better way to evaluate all stocks. Now, what are we talking about here? We're talking about a reverse DCF model. Well, first of all, let's take a second to talk about what a DCF model is. If you look at it from Google, a discounted cash flow model is a financial model that estimates a company's value by forecasting its future cash flows and discounting them to the present value. Pretty straightforward, right? They're based on the concept that the value of an asset is equal to the present value of cash flows it generates now and in the future. And you have to bring things to the present because cash flows in the future are not as valuable as those in hand today. Like a bird in the hand is worth more than 2 in the bush. The ones in the bush are subject to inflation and the risk that they may not actually ever emerge. Now, the problem with this kind of cash flow models is that they're really hard to use. They're hard to build. They're hard to understand. Some people have never heard of them. Well, when I started New Constructs, the first thing I did was build technology to make that easy. That's a big part of what New Constructs RoboAnalyst technology is all about. That's to empower the everyday investor with the tools they need to make more informed decisions. Part of that's a truer measure of profits, which we're proven to provide. But a big part of it also is this reverse discounted cash flow modeling system. So what the heck is a reverse DCF? Well, a reverse DCF says that instead of trying to predict the future, I am going to start with a stock price and reverse engineer what the cash flows have to be to justify the stock price. For example, let's take bonds. We can price a bond exactly, precisely, because we know the cash flows, the coupon payments. We know the risk to those cash flows, the interest rates. That's what you discount those cash flows by, those coupon payments by. And we know the maturity date, or we know the duration or the horizon over which we expect to get those cash flows. So it's a pretty straightforward model for a discounted cash flow model. It'd be really simple with a— for a bond. That's why we get a precise price. price for bonds and markets all the time, and people can calculate those. For stocks, it's kind of the opposite. It's on its head. We don't know any of this stuff for sure. We have hopes, right? But we do have a stock price. And if you believe in the concept that the value of an asset is equal to the present value of its future cash flows, well then you believe that there's a future cash flow stream that this stock price embeds. And that's exactly what reverse DCF expectations investing is all about. What we talk about here for stocks is really pretty similar for bonds. You've got stream of cash flows, coupon payment. Your risk is your weighted average cost of capital, and your maturity date is, is your growth appreciation period, or the number of years the company's expected to grow its profits. All those 3 things can be put into a DCF model and they'll give you a stock price. But a reverse DCF says, you know what, I'm going to start with the stock price and I'm going to solve For these 3 things. Now that means we provide projections for revenue growth and the economic profit margin, and that's simply just return on capital minus the cost of capital. And then we solve for the gap. So we put in consensus estimates for revenue growth, economic profit margin, or the return on capital versus the cost of capital stays roughly the same as it was in the past. And then we solve for the gap. We can figure out what the market implied growth appreciation period is. So the most dynamic and difficult element to understand for a business is its competitive advantage period, or how long it can continue to grow profits. That's something we actually push off to the market to tell us instead of trying to perform on our own. So let's put this into practice. I actually have a reverse discounted cash flow model that I'm going to show you today for Nvidia. And in that model, I created 2 scenarios. One that has really high revenue growth and high profit margins, and one that has high but not as high revenue growth and profit margins. Here's what you get when you put that into our model. See, let's pull up the optimistic. Let's pull up the pessimistic. Here we go. So these are the implied values per share over a very long time period, 100 years. These dots show where these scenarios, these discounted cash flow model scenarios, produce values equal to the current stock price, which right now is about $100. When I first published this report, or when I called the top, the stock was at over $126. So, um, again, it's come down a lot, and I think it's got— still got a lot to come down. Now, the way you interpret this chart is put together in this summary table here. Here we've got the performance hurdles. Remember I told you revenue CAGR, return on capital minus the cost of capital? You can ignore these prices, they've not been split adjusted appropriately. We're We're gonna fix that. And then here's the return on capital versus cost of capital historically. In the optimistic scenario, we're gonna go in the middle here. That's the latest closing stock price as of yesterday. And what this table says is that in order to justify this stock price, the discounted cash flow model has to assume 50% compounded annual revenue growth for 7 years. And an average return on capital versus cost of capital spread of 468%. That's quite large compared to what the company's done in the past. The neutral scenario says, okay, let's look at a different scenario. And by the way, we can look at an infinite number of scenarios with this tool on our platform, but I put together these 2 for illustrative purposes. You got a 30% revenue growth rate, quite a bit lower than the 50%. Your return on capital versus cost of capital spread is lower, but you have to go for more than twice as long. Nvidia's got to grow profits for more than twice as long, albeit at a relatively healthy revenue growth clip and still a very high return on capital versus cost of capital spread. Now, that's an interesting proposition. The question you have to ask yourself when you look at these stats here above. The question you ask yourself— and the beautiful thing about expectations investing is that it relieves the investor of having to predict the future. So the question you have to ask yourself is, do you believe that Nvidia can achieve the expectations baked into the stock price summarized above here? That's the question you have to ask yourself. If your answer is yes, then the stock is fairly valued. If you think Nvidia will do even better, then the stock is cheap. If you think Nvidia won't do as well as the expectations baked into the stock price, then the stock is expensive. So I think my next step here is to get a sense of, okay, well, what do these expectations mean in real terms? Like, I can see like 50% for 7 years, okay. You know, what does that mean? What does 30% for 15 years but with lower margins mean? Well, we can take a look at that. We can look at the implied revenue. So at a 50% growth rate for 7 years with that super high return on capital, you're looking at revenue reaching over $1 trillion. That's what the chart tells us here. In the pessimistic scenario, you're looking at revenue reaching over $3 trillion. So what does that mean? Is that a lot? Uh, well, you go back to a report here and we look at the GDP of the biggest countries in the world. Turns out $3.7 trillion would have been more revenue than the entire GDP of India in 2023. If we're talking about $1 trillion, we're talking about close to one of the top largest countries in the world for revenue. So next step then is, okay, those are pretty high revenue numbers. What do we think about the implied return on invested capital that the company has to achieve at the same time to justify the stock price? So we can simply go to our dropdown menu here and say, okay, what, what about implied return on invested capital? In scenario 1, or optimistic, the company's got to get close to a 750% return on invested capital. Scenario 2, return on invested capital is to be well over 1,000%. Those seem like big numbers. How high are they? Well, in the report I give some detail. It's much higher than what the company achieved just at the end of the last fiscal year. So let's put this into some more context. Over the last 5 years, we looked at the number of times that an S&P 500 company achieved an, an ROIC greater than 100%. Only one company's done it once in one period over 600%. Nothing's been over 700%. Yet we're seeing that Nvidia stock price is predicting its ROIC is going to be higher than anything we've seen in the S&P over the last 5 years, double what happened in the S&P over the last 5 years. That seems like a pretty tall order. Next, I also like to look at 2 of the highest returning capital companies in the world. And this is where we tie everything back into the competitive advantage period and growth appreciation period concept. And that is to look at, again, 2 companies that have had really high returns on invested capital in the past. Some of the greatest businesses of all time that have sustained. We got Microsoft. They peaked at return on capital 200. That came down pretty quickly. You got Apple. Peaked at return on capital of almost 400. They maintained that for a pretty good amount of time. You know, you got from like 2008 to about 2016. But the point is, both of them suffered from significant competitive attrition. The law of competition. If your margins are really high, if your revenue growth is really high, both of those are really high. You're going to attract competition. And just as we've seen with the recent news from Broadcom, the big superscalers, the Microsofts and Apples of the world, are they going to put so much money and so much of their dependence on one other company, Nvidia? Probably not. They've got the scale, they got the resources to build out some pretty incredible processing power and computing power on their own. Why would they want to be that dependent on any one company? Then you got to think about all the other chip companies, startup companies, Private equity firms who are seeing the enormous amounts of profits that Nvidia is enjoying, they're going to just sit aside and say, oh, you know, let's let them have that. Let's just let them have 30% compounded annual revenue growth that gets you to $3.7 trillion in revenue and returns on invested capital greater than 1,000%. Let's take a look at what that means in terms of future profits, free cash flow. Compared to what they've done in the past. You can see free cash flow from Nvidia has actually been really good, but when you put this into the chart of what they're going to be doing— $430 billion a year, $1.5 billion a year— it makes what they've done in the past look extremely small. The point is, when somebody's generating even the profits that Nvidia is generating today, which is around $43 billion, $44 billion, right? A fraction, a tenth, almost a tenth of, of what it's expected to achieve. Everybody's oohing and aahing over Nvidia's current profits. What do you think about the implied future profits? Anyway, point being, we know that hundreds of billions of competition capital have been allocated to AI, which is direct competition to Nvidia. And we know that firms like CEOs of the firms like Broadcom are predicting a shift away from huge amounts of dependence upon Nvidia, competitive forces. All this is another way of saying that I think there's less than a snowball's chance of hell for Nvidia to come anywhere close to achieving the expectations baked into the stock price. That's how I used our secret weapon reverse dynamic DCF model. To call the top in Nvidia. Thank you.