The Deal Room: Can Nvidia Keep Winning? Is Tesla Losing Its Edge?
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Hello and welcome to The Deal Room, where every Wednesday we talk specifically about all things corporate finance, from the biggest M&A and PE deals to the strategy that drives business decision making. We aim to bring what you learn in the classroom to life with real world examples and hopefully at the same time have some fun with it. So let's dive in.

Hello and welcome back to The Deal Room where I'm joined by Stephen to go over two companies of interest here. And I am super keen to know, Stephen, what you've got to say because you just told me you have updated your DCF models for NVIDIA and Tesla.

And so always of interest those two key names, but particularly because there's been a lot of news flow of late and everyone always wants to know is someone like Nvidia overvalued? Is someone like Tesla again overvalued? And particularly with some of the noises as well that Elon's been making about all different types of things. I'll be interested to know. Also,

Before we begin, I did notice there was something on your desk. If you're looking in video format, there is something in your hand. What is that?

Yeah, thank you, Ant. This is the prestigious Best Business Under 50 People Award that we won last night at the London City Awards Ceremony. And yeah, we smashed the competition. I mean, they never really had a chance, to be honest, but good to take away the gold and celebrate what has been a pretty amazing year for Amplify. So yeah, I'm going to take this home with me. Sorry, Ant, this is coming home with me.

And I'm going to show it off to my family. Yeah, and I know a number of the staff do listen to the podcast and very rarely do we shout our own team, the wider Amplify staff out. So this one's for them. So yeah, let's go. Hit me with NVIDIA. Why am I looking at NVIDIA at a closing price yesterday and they closed down, what, 8%?

Yeah, it's been a mad week for NVIDIA. And obviously we're coming off the back of the deep seek rumbles and Trump tariffs and a lot of volatility in the markets. But because we're on the deal room and not the market maker, I really want to talk about its latest quarterly and actually full year 2025 results, which came out last

About mid last week. And you're absolutely right. I've got a little graph in front of me. Share price down 15% last week in kind of stages, but mainly in reaction to the company's earnings release. Now, we've covered this on the podcast before, this kind of weird thing that unless NVIDIA kind of absolutely smashed their earnings performance,

beats, estimates, etc., then the share price is going to go down because people believe it's so fully valued. But what I'm going to do today is I'm going to give the kind of high level of the financials. I'll maybe make a little bit of a bare case. Why is the share price going down? But then I'm going to talk to you about why maybe it's a little bit undervalued. And I'll bring in my DCF analysis and we can have a chat about it.

But, you know, I sent my notes over to you earlier on today and the first graph that I wanted you to see was

was Nvidia's quarterly revenue. And it is the most beautiful archetypal hockey stick. It's quite remarkable. So much so that in Q4 2024, or it's actually Q4 2025, again, they announced the results at the end of January, or their year end is the end of January, their revenue, $39.33 billion for the quarter.

That is a 78% year-on-year increase, beating estimates of $38.25 billion. So they beat already very punchy

investor or analyst estimates you know they're up 12% quarter on quarter it is a phenomenal story data center revenues up 16% quarter on quarter 35.6 billion there was a concern after deep seek that that might start softening maybe there's going to be a little bit of pullback in big tech mag six

plus Nvidia demand for these chips. But it's, you know, to all intents and purposes, this has been another bumper, bumper, bumper, bumper, bumper quarter. So why did the share price fall 14% last week? Oh yeah, I'm interested to know because I did a post, I immediately posted a short form video. So if anyone doesn't follow, shameless self-plug,

If anyone doesn't follow me on LinkedIn, I tried a new short form video of surmising it in aftermarket five minutes after it came out. Excuse me. And it was flat at the time. And I was going off the notion in my snap analysis then that

that we've dodged a bullet here. It felt like the market was kind of setting up for failure almost because we'd been in a bit of a negative spiral of bad economic data, a string of it in the US, a lot of hope on NVIDIA, high bar, as you said. But I saw that outlook was what surprised me at the time the most. And I thought that was a supportive thing. And I thought NVIDIA were going to get away with this.

Because they were saying their outlook beat expectations. I mean, it did have a bit of wiggle room, minus or plus one or two percent. But at the time, they were flat. And I thought that's a good result because I think the market position was tilted to the downside. But evidently, something changed in 24 hours that passed between the immediacy of the release to then when people chewed over their bones. So what did they see?

Yeah, and I think there's, you know, there's market sentiment here at play in the sense that this is a market where investors are looking at any opportunity to be a little bit bearish on these big tech stocks in particular. You know, there's all sorts going on. And I wouldn't say that confidence and stability are particularly high.

But with regards to NVIDIA in particular, I'm trying to pick apart the reasons why analysts kind of, you know, turn their nose up at this earnings release. And I think the first one is their gross profit margin. Remember, the gross profit margin is your revenue minus your cost of goods sold. The higher your gross profit margin, the kind of cleaner the revenue.

flow through from revenue through to the to your bottom line to free cash flows and contributes to your valuation so the fact that gross profit margin was down 1.6 percentage points quarter on quarter down three percentage points year on year to 73 percent starts to beg the question is

or are NVIDIA's chips getting too costly and complex to create? And this is all in the context mainly of this Blackwell chip that we've spoken about previously. And it's amazing how quickly they've ramped up Blackwell production. And I think they generated a

11 billion dollars of sales from Blackwell in the last quarter, bearing in mind it was puttering along and there were a few delays to ramping up last year. Could I make a gross margin adjustment and say that actually it's a short-term blip, we had some manufacturing faults we need to deal with, this is me with my Nvidia hat on, we're going to have to eat into some of that gross margin in order to accelerate it

in the long term beyond the fix going that we've had insane demand for the Black World ship that we want to deliver.

and meet that demand? Well, I mean, you didn't put it quite as eloquently as Colette Crease, the CFO, on the earnings call. And one of the big questions was, look, what's going on with these gross profit margins? And she said, during our Blackwell ramp, our gross margins will be in the low 70s. At this point, we are focusing on expediting our manufacturing and making sure we can provide to customers as soon as possible. And once it does...

Once our Blackwell fully rounds, we can improve our cost and gross margin. So we expect to probably be back in the late 70s later on this year.

So I think you're right. She got my email then. She didn't say thanks to that, did she? No, no, no. It got lost in the mail, I think. But yeah, so maybe that's one reason why investors softened on NVIDIA and the share price went down. There's obviously this slightly larger looming threat of...

big tech companies kind of starting to rein in their monster data center and AI expenditure. So

I just got a little clip here from TD Cowen. Earlier this week they published and said that Microsoft, one of Nvidia's biggest customers, was cancelling leases with private data center operators. And it's one of these things that even the kind of the smallest canary in the coal mine can start getting people quite jittery. This probably wasn't a big thing at all from Microsoft. It might have been something completely innocuous.

But, you know, because NVIDIA is so reliant on this AI boom, this AI revolution, every time something comes along to potentially soften it, the share price takes a bit of a hit, right?

One thing I'll leave you before I give the is Tesla is NVIDIA undervalued case. I quite like William Stein of Truist Security. He's a Truist Security analyst. He wrote in a note last Wednesday that, and I quote, investors are yawning. I mean, look,

In any other world, 78% year-on-year revenue growth and a quarterly revenue of $40 billion, I would be jumping for joy, not yawning. But it just goes to show the idiosyncrasies of the market at the moment. Yeah, if I was the strategist working with NVIDIA, I would actually lean into some of this negativity. I wouldn't try to fight it. And I'd actually, you know, if the share price needs to come off a little bit, I don't think that's a big deal.

I think it's almost like you need some of this perspective that I think some of these analysts have to wash out for the next leg up. It almost feels like, so you're better off not being stubborn and almost reining in and being quite bombastic as Jensen does, but actually from forecasting being pretty realistic in order to then rein back expectations so you can start superseding them by a large margin again.

Yeah, and this is all part of the game. And for people that don't know a lot about, I wouldn't call it pure financial engineering, but certainly the goal of a CFO is to provide stable,

transparent visible growth quarter by quarter year by year so there are very there are a number of ways the dark arts to you know to delay some revenue recognition until the next quarter hold back on releasing a new product in order to smooth out that kind of really nice you don't want a kind of

50-year quarter-on-quarter revenue bump and then a 20-year drop, right? You need two nice, solid 20-year growth quarters. And one of the best companies at doing this is LMVH.

LMVH are absolutely brilliant at just tactically releasing new products and releasing supply, you know, in order to hit their numbers every single term. Same goes with Hermes. You know, they've not had an earnings miss for years and years and years because they just kind of tweak a little bit, you know, Birkin bag, just get a few more out there. And it's really, really smart the way they do it. Obviously, not every business can do that, but it's an interesting one.

So what's your latest calculation telling you? Well, look, I read an article earlier today that says, is 3 trillion NVIDIA a value stock? You know, it was a bit of a kind of clickbaity article. But I was looking into the numbers before I get onto DCF. So NVIDIA is currently trading...

as of Friday last week, at a 27 times forward PE price earnings ratio. So price per share divided by earnings per share, 27 times, which is quite high, but the S&P 500 forward PE ratio is 21 times. So NVIDIA with this, you know, again,

These growth companies tend to grow into their valuations if they do the right job. You know, a P ratio early on in a growth, you know, in a growth trajectory might be upwards of 100 times and then it comes down to 80, still looks a bit expensive, 60, starting to look more reasonable. You know, if the growth keeps going, you eventually...

you know you sprinted off ahead and then you eventually fall back in with what is relatively normal ratios relative to your peers

So a 27 times forward PE ratio for a company that is still growing. I mean, 78% year on year. It won't do that next year, but it will do it, you know, probably 40, 50, 60%, whatever the predictions are. EV, EBITDA 33 times, as I mentioned before,

The Blackwell chip contributed $11 billion of revenue in the last quarter. They were only expecting that to be $4 or $5 billion. It just overshot to the upside. And before I get onto my DCF, its operating profit margins are 61%. So even though its gross profit margin has softened, its operating profit margin has maintained its resilience and actually gone up a little bit.

So is it over or undervalued? Let me just bring up my DCF model, which I was working on this morning. So updating it for full year 2025 and just eyeballing. So revenue in full year 2024 was $61 billion. Revenue in full year 2025, $130 billion. Just like the most, these numbers are absolutely staggering.

I read that NVIDIA's sell-off, $250 billion of market capitalization, was the same size as Walt Disney, just in a sneeze. So anyway, so I put in some, I'd say quite, I don't know,

Quite punchy revenue growth forecasts, averaging out at about 45% revenue growth over the next five years. It might not be that high. I can adjust that down a little bit. But anyway, I've been relatively conservative on working capital and CapEx and things like that. I've updated my risk-free rate, my equity beta, my equity risk premium, all things you need to do when you are looking at the weighted average cost of capital.

Their debts become a little bit cheaper, which is always good, but they only have about $8 billion of debt on their balance sheet. Flow this all through into our DCF. And remember the current share price, well, as of Friday was $120 a share, giving it a $2.93 trillion market capitalization. Flowing it all through to my account.

implied value per share and applying a perpetuity growth rate of 2%. That means that after my five-year forecast period, I'm expecting effectively NVIDIA to grow in line with US GDP 2% forevermore.

But by the time you get to 2030, by the way, it's unlevered free cash flows are going to be theoretically upwards of $400 billion. So this is an absolute Goliath company. All that to say that my implied value per share is $175, right? Giving an implied equity value of $4.2 trillion.

Now, obviously, if I, the beauty of these models, if I tweak my, if I tweak my revenue growth assumptions down, flatten that out to about 30%, my model goes down and says, look, $150 a share. But, you know, is there a case to say that this company is now certainly,

I wouldn't say it's massively frothy, bubbly, overvalued. You know, this is ridiculous. What are we all doing? We're all, you know, we're all about to, you know, there's going to be a big, there's going to be a big crash. But yeah. And by the way, I'm not saying this is a buying opportunity. I was just about to say,

Put my serious hat on. This is not investment advice. This is purely for education purposes. But before I say that, because it is important, actually, because I know that there was a wager that a single trader put on of 3,000 contracts last week.

which was basically a bet that their shares were going to drop to $115. And these bets typically, option related, have a certain date set in them. And this was by basically a week's time. So saying that it's going to drop another 10% from its current levels, even though it's already been coming lower. And so I guess it's important to understand that whilst there could be

a mathematical science behind them being arguably good value. That is over, you know, we're talking about investment cases for certain durations, whereas trading, you know, as you look at any chart, yes, stock market, if you stay invested, generally goes up over time. It's kind of the dirty secret in investing. But the problem is, is people try to trade these things.

And it's never a linear move upwards. It has a lot of peaks and troughs. Yeah, and we were doing a stop pitch fundamentals teach-in last week. It was great. We had about 250 people on the call. It was fantastic. And one of the big...

One of the big learnings for the group was that difference between investing and trading. And if I'm doing a stock pitch to an investment committee for a long only fund that wants to hold for 5, 10, 15, 20 years, you don't care about the, you know, the overnight volatility, the kind of near-term oscillations. That's trading, that's speculation, you know.

informed speculation maybe but you're looking at the real fundamental drivers of this business and really getting deep and you you know a little bit like warren buffett you want to kind of you know want to treat them like your kids right you want to build relationships you want to hopefully hold them forever and never give them up because they're such great companies and that's what you get into that slightly deeper level of analysis

Okay, so on that point, good segue, because your notes made me feel a little bit nervous about my long-term exposure to Tesla. What is your long-term exposure as part of an index? You haven't put a position on it. I've always had a little bit of Tesla, just because I don't like Elon.

Don't be fooled to think that I've not got a slice of the Elon pie. Well, look, we are going to talk very quickly about Tesla's earnings. And again, Q4 earnings came out, which means that their 10K also came out, which means that we can fully update our DCF models. And Tesla is one of those companies that we track. Now, again, I'm looking at a graph. Last week, Tesla share price dropped 20%.

to rein that market capitalization below a trillion dollars for the first time in a while, a market gap of $864 billion, but a price earnings ratio of $138 billion still. What were the big concerns? I mean, this is so interesting. This is a case of the...

the nuts and bolts financial statement reality of the business versus the you know potential

the frothy future case that this could be the most valuable AI transportation robotics mobility company ever made. And actually, you know, this should be worth 10 times more than it's worth now if you factor in all of those, the kind of Cathie Wood arc upside case, right? But if you just look at the nuts and bolts numbers, this was a shocking quarter and a pretty rubbish year. So, yeah,

In Europe was a massive concern, 45% sales drop in Tesla cars. That's not representative of a fast-growing company. In fact, its revenue was only up 2% year-on-year, but actually its automotive revenue was down 8% globally.

So this is a really, you know, this is a company that basically hasn't grown from a revenue perspective year on year. And that's obviously not growing. You know, when I spoke earlier about NVIDIA growing into its valuation, Tesla is just not growing into its valuation because Tesla to a wide swathe of the market is not growing.

valued as a car company and and yes the share price did drop quite significantly there were definitely jitters there but i think the jitters are probably more related to the lack of progress on all of the exciting upside such that you know these financials were very very poor you know gross profit down operating profit down you know it's not a good picture to tell but

So whenever these numbers come in worse and worse and worse, what do you think Elon does on the earnings call? He goes more and more hyperbolic. One question for you. I didn't know this. Do you know what Elon Musk's middle name is? No, I'm not even going to guess because it's probably something unusual. Elon Reeve, R-E-E-V-E, Musk.

There you go. It was on the transcript. Chief Executive Officer and Product Architect. Now, I don't want to give... I would say I don't want to give too much airtime to Elon Musk, but this is really, really funny. I love reading earnings transcripts and...

I was reading the NVIDIA earnings transcript and my gosh, again, I was saying in the stock pitch session last week, if you're trying to pitch tech stocks, you really need to know tech stocks. And the complexity of the type of questions that were being asked by analysts and the sophistication in the answers were such that you're like, okay, all right, this is orders of magnitude beyond my knowledge and understanding at the moment. But Elon Musk does it a little bit differently.

So I'm just going to quote a few things from his opening address. I see a path. I'm not saying it's an easy path, but I see a path of Tesla being the most valuable company in the world by far, not even close, like maybe several times more than. I mean, there is a path where Tesla is worth more than the next top five companies combined. Yeah.

It's absolutely bonkers. And I'd like to say, setting up for what I think will be an epic 2026, kicking that can down the road, and a ridiculous 2027 and 2028. Ridiculously good. Who is this sounding like, by the way? Well, he is hanging out with his buddy, like, 24-7, so...

That's my, yeah, that's my prediction. As you very few people understand the value of self-driving and our ability to monetize the fleet. Some of these things I've said for quite a long time. And I know what people have said. Well, Elon, the boy who cried wolf a lot, like several times. But I'm telling you, there's a damn wolf this time and you can drive it.

That's brilliant. And an update on Optimus, our friendly robot companion. Will we succeed in building 10,000 exactly by the end of this year? Probably not. But we will succeed in making some, several thousand maybe. So again, this is, yeah...

Yeah. And then he goes on to say, my prediction long term is that Optimus will overwhelmingly be the highest contributor to the valuation of the company. The only thing, and I'm going to leave you with this, the only thing holding us back, Tesla, the only thing that's holding us back is an excess of caution. Wow. I was going to ask, like from a strategy perspective, so...

It seems like particularly he's going to be aligned with the administration for the time being, let's say. They haven't fallen out yet. So let's say he's got another 12 months at Trump's hip. So is that when I think about the type of people who are buying Teslas when Teslas first came on the market?

to the types of people now that Elon and Trump are appealing to. It seems like two quite contrasting demographics in terms of the profile of your average buyer of a Tesla. That in combination then with BYD and increasing advancements of an appetite on the demand side, as well as the technology and the actual vehicle side. And then the third element, so the competition factor increasing, the competitive advantage decreasing,

So does all of this sort of lead you down the idea of, you know, the models it seems with Tesla seem pretty fatigued as well. Is it worth just pivoting strategy? And like he's kind of alluding to, he needs to just, I think the motor vehicle part of the company needs to just kind of like,

die at slow death and then and just put all guns blazing in all these other areas a lot of risk because you have to hit the mark on something in order to start showing progress but does it you know is there any longevity in the the tesla car thing or i guess the payoff ultimately is the autonomous side right

yeah it's really tough I mean he would say he would say look the average car gets used 10 hours a week and at a conservative estimate our automated robo taxis will be out on the roads for 50 or 60 hours a week and therefore that's a 5 to 6x increase in utilization and we become 5 to 6x more valuable but I

I think your points are right. So the BYD thing is very interesting. And I don't know if you've actually seen a BYD car in the flesh. I was...

I was having a walk yesterday and I saw a BYD seal and I thought to myself, that looks like a jazzed up version of a Tesla Model 3. And in fact, on the inside, it's got exactly the same kind of pop out iPad like interface, but obviously it's cheaper and it doesn't have the kind of musk tarnish.

There's obviously that great bumper sticker that says, I bought my Tesla before Musk went crazy. And you're absolutely right. He is appealing day to day to an audience that doesn't tend to buy kind of green friendly Tesla cars. And Trump is all about drill, baby, drill and cutting down electric and renewable energy subsidies. So it is a little bit of a strange one. Does he go all in on, you know, on Tesla?

You know, on robots or whatever it might be. Well, you know, they're spending $5 billion a year on AI, which is a big number.

And it is one of the reasons why the share prices remained quite resilient and remained at those levels. But $5 billion a year on AI relative to the real big players, the Microsofts, the Metas, the Googles, this is a drop in the ocean. It's not big enough to drive them being at the top of the totem with regards to AI innovation. So yeah, it all feels a little bit messy and a little bit muddled at the moment. And hence why the shares are down 20% this week.

Could you ever, I'm just asking a naive question. Could you ever take XAI and merge it into Tesla and become one united company? Well, absolutely. I mean, that's what he tried to do with OpenAI back in the day. Couldn't do it because it was a not-for-profit. But XAI, you know, very, very highly valued startup. It's separate from but integrated with Twitter or X. So it's all part of the same ecosystem.

Yeah, and I think that if you read a detailed analyst report, that might be one of the quote-unquote upside cases where these things all come together in a virtuous cycle of data through, you know, six billion miles of self-driving, you know, miles, plus loads of Twitter data, plus the algorithms of X.AI, and you create this kind of mega company, right?

That could be one of the bull cases, but it's still quite a long way away. Okay, so is there a number here that you've calculated? There is a number. Let me just get my Tesla updated DCF. Here we go. So my updated number. Again, putting the new 10K in there and...

Again, because I'm just looking at the financials, because the company barely grew, it grew by 0.9% revenue wise last year, 23 to 24. I've updated all of the numbers and my share price is coming out at $155 per share. Company's trading at 280. This is not investment advice. Yeah.

But you know where I stand, right? It's got a, yeah, it's a remarkably highly valued company. One of the things though, surely like with Tesla, given like the kind of standard movement comparative to other similar Mach 7 stocks, it's obviously much wider, the scope of average price movement. I'm assuming then when, if I was to investigate and look at all the different models of all the different analysts that you've mentioned when it comes to different banks and

and so forth. Surely there's such a wide range of estimates that it's kind of, how, I suppose as an investor, what you need to hear all arguments and pick a side essentially, because it feels like there's probably no point looking at an average because there's going to be the dispersion of price targets are going to be so wide. Yeah. So I don't know what the, to what extent Tesla is fundamentally a retail company.

kind of meme stock where a lot of the flow and the volatility is based on. Individuals, I can imagine most sober funds might want to put it in as part of a kind of maybe weighted equally so that it doesn't lose out when the gyrations kind of move to the upside. But I would say that if you're a hard thinking, hardworking, diligent, high attention to detail analyst,

you would not be wanting to make a conviction-led fundamentals bottom-up kind of view on Tesla at the moment because there's just too much noise. So you might need to hold it just so that you get exposure in case things go a bit mad. But I don't think, unless again you're Cathie Wood and you think it's worth $5 trillion, I just don't think the normal...

fund manager on the street would get particularly excited or they probably wouldn't touch it with a barge pole all right well on that positive note we'll wrap it up and wish everyone a great week ahead and yeah stay tuned as well some of you might have seen i've been recording a mini series with women across different roles in the industry and i've got a really cool conversation that i recorded a

so do check that out for sure there's so many great tips there for not just students but people in their early careers so keep an eye out for that you can see the previous episodes scroll back on whatever podcast platform you use or jump on the youtube channel you can see the videos and also one final request if you've made it to the end of the episode thank you for sticking with us but

I do know that a large proportion of our listeners are already actually subscribers. And so in order for us to grow and help as many people as possible to talk about and demystify these topics in finance, please, please, if you are listening regularly, hopefully you're enjoying it. So share it. WhatsApp.

I've been told is the most effective because I know lots of people, particularly students who are in lots of WhatsApp groups, stuff like that. I would love it if you could share it. If you could do one thing, that would be super cool. All right, Stephen, thank you very much and see you next week. Yeah, thank you, Alan.

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