Money managers are dumping Nvidia (NASDAQ:NVDA) stock. With shares already up 90% in 2024 and having more than tripled over the past year, the chipmaker is getting pricey. While tremendous growth potential remains for its business, NVDA stock’s valuation suggests it is grossly overvalued.
By how much? When companies use free cash flow (FCF) to invest back into their business, they perform a reverse discounted cash flow analysis. So, we can see how much FCF growth is priced into the stock. For example, assuming zero growth – meaning Nvidia doesn’t produce another dime of FCF for the next 10 years – NVDA stock would be worth around $19 per share. That’s dramatically below the current $914 per share. But, it’s also just a baseline figure.
Assuming 10% growth, a healthy amount to forecast, that gets the chipmaker to around $43 per share. Doubling growth to 20% gets us to $89 per share while doubling it again, or 40%, puts NVDA stock at $332. In fact, it would take Nvidia growing FCF at over 57% a year for the next decade to reach its current valuation.
While there are various assumptions you can make that will change the final value, NVDA stock looks wildly overvalued. That doesn’t mean the stock won’t still go up from here. But it’s understandable that hedge funds like Millennium Management sold almost half its position worth around $785 million. Another example is Jennison Associates selling off over $2 billion worth of stock.
No matter how much you like the chipmaker, if you’re concerned about its valuation, here are three stocks to buy instead of Nvidia.
Uber Technologies (UBER)
One of the stocks attracting a lot of hedge fund attention is ride-share leader Uber Technologies (NYSE:UBER). Some $10.8 billion in hedge fund money poured into the stock as it recorded its first-ever annual profit. UBER is up 30% in 2024 and over 140% higher from a year ago. Revenue soared 15% to $9.9 billion while adjusted EBITDA doubled to $$1.3 billion.
Also, the world’s largest ride-share company forecasts a profitable first quarter with adjusted profits of $1.26 billion to $1.34 billion. Uber Technologies has 150 million active monthly users a 15% increase from the year ending 2022. The company is exploring new technologies, such as autonomous vehicles so that it doesn’t have to split fares with drivers anymore. Uber partnered with Alphabet‘s (NASDAQ:GOOG, GOOGL) self-driving Waymo service as well as Motional, the autonomous vehicle joint venture of Hyundai (OTCMKTS:HYMLY) and Aptiv (NYSE:APTV).
While Uber had previously sought to develop its own flying car service, it subsequently sold the business to leading electric vertical takeoff and landing (eVTOL) stock Joby Aviation (NYSE:JOBY). Additionally, it invested $75 million in the company that wants to be the Uber of flying taxis.
Uber Technologies looks like it is delivering the goods for investors and could drive higher in 2024.
Visa (V)
Visa (NYSE:V) is the largest payments company with some 4.3 billion Visa cards in circulation. It generated $14.5 trillion in total payments and cash volume for the full fiscal year.
Hedge funds including State Street (NYSE:STT) and BlackRock (NYSE:BLK) are pouring money into it, too. Those two bought over $830 million worth of V stock between them, but some $7.5 billion from other smart money players scooped up shares also.
There is good reason for the attention. Visa is massively profitable with gross margins of 98%, operating margins of 57% and net margins coming in at 50%. That’s because it has stuck to its knitting. Instead of branching out into the lending side of the business Visa is content to remain a payments processor that distributes its brand to credit cards. While it foregoes generating interest income off of debt, it protects its downside during economic downturns.
Also, it shields investors during downturns. Visa pays a dividend that, while only yielding 0.8% annually, grows its payout at a ferocious pace. The credit card company has raised the dividend at a compounded annual rate of 18% for the past decade. That makes it an excellent stock for billionaire investors and mere mortals like the rest of us.
Meta Platforms (META)
Facebook owner Meta Platforms (NASDAQ:META) is the third stock in which hedge funds are interested.
It has attracted $14.1 billion in smart money investments, including from State Street, AllianceBernstein (NYSE:AB), and Vanguard. That trio contributed $3.1 billion to the total.
Meta Platforms found its groove and is growing like a weed. META stock is up 44% this year and 155% higher over the last 12 months. It cracked the $1 trillion valuation (again) as it attracts greater numbers of users to Facebook, Instagram and WhatsApp. At last count, Meta had 3.96 billion monthly active people across its family of apps, up 7% year over year (YOY).
The social media giant had $75 billion in cash, equivalents and short-term investments, so it announced it would begin paying a dividend to shareholders. The payout will initially be 50 cents per share, or $2 per share annually, for a yield of about 0.4% at current prices. That alone might have been enough to attract the smart money and have them shift their investments into META stock.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.