Shares of high-performance chip specialist Nvidia (NVDA -0.01%) are currently down by around 30% from the all-time high of $346.47 they hit in November.
Much of that drop-off can be attributed to traders shifting their funds away from growth stocks and into value stocks in response to the Federal Reserve's plans to hike interest rates and reduce its balance sheet in 2022. A stronger-than-expected January jobs report and surging inflation can be expected to strengthen the Fed's resolve to go ahead with tightening monetary policy -- and that's not a positive sign for capital-hungry growth companies.
Further, at its elevated valuation, Nvidia is also exposed to significant headline risk. Its stock price slid briefly Tuesday after news broke that it was abandoning its planned acquisition of mobile-chip designer Arm.
The U.S. Commerce Department has recently highlighted the fragile nature of the global semiconductor supply chain in 2022. However, the agency also expressed the possibility of new manufacturing capacity coming online as early as the second half of 2022, which may help somewhat in reducing the chip shortages. With Intel, Taiwan Semiconductor Manufacturing, and Samsung having already planned huge investments in capacity expansion, we may see increased pricing pressures in the semiconductor industry in the next few years.
While none of these challenges should be taken lightly, there are still many tailwinds that can make Nvidia a winning pick in 2022. Let's look at some important ones.
Gaming and data center segments remains unparalleled
Since fiscal 2019, ended Jan. 31, 2020, Nvidia's revenues and free cash flow have more than doubled, while gross margin and operating margin are up by 490 basis points and 920 basis points, respectively. This terrific growth has been mainly driven by increasing demand for the company's graphics cards and artificial intelligence (AI) processors in gaming and data center segments.
Nvidia currently accounts for almost 80% of the gaming GPU market. The company's GeForce RTX-powered laptops are being increasingly used not only in gaming but also in areas such as esports, digital content creation, and streaming. Nvidia estimates that only one-fourth of its installed base has adopted RTX GPUs. There remains much opportunity as existing GeForce gaming users continue to upgrade from legacy GTX cards to RTX laptops. Thanks to these tailwinds, Nvidia saw its gaming revenues jump 72% year over year to $9 billion in the first nine months of fiscal 2021, ended Jan. 31, 2022.
Nvidia also accounted for almost 80.6% of the global cloud and data center AI processors market in 2020. With the company's chips considered the gold standard in high-performance computing, AI, edge computing, and analytics, Nvidia is well-poised to target the data center market estimated to be worth $100 billion by 2024. In the first nine months of fiscal 2021, the company's data center revenues soared by 53% year over year to $7.4 billion. Increasing revenue exposure to the data center segment is also helping improve the company's gross margin profile.
Automotive and the metaverse opportunities
The automotive business is increasingly seen as the next big growth catalyst for Nvidia. The company offers a complete platform solution, which includes hardware, software, and infrastructure (servers, computing power, and data centers) required to support autonomous vehicles. The company estimates its design win pipeline for autonomous driving and artificial intelligence cockpit platform to be over $8 billion. With Nvidia's automotive business generating only $441 million in revenue in the first nine months of fiscal 2021, there is still much runway ahead for the company in the coming quarters.
Nvidia is also well-poised to capture a big chunk of the evolving metaverse opportunity, estimated to be in the range of $1 trillion to $30 trillion depending on the source. The company's high-throughput GPU chips, data center CPU, and next-generation Bluefield data processing unit will play a major role as the hardware technology needed to support the metaverse. Nvidia has also introduced a scalable, real-time software platform called Omniverse. It enables designers working on diverse software platforms to virtually collaborate and develop 3D simulations of real-time objects.
The recent pullback is an entry opportunity
Analysts expect Nvidia's revenues in fiscal 2022, ending Jan. 31, 2023, to be $31.54 billion, while generally accepted accounting principles (GAAP) earnings per share is expected to be $5.18.
Based on these forecasts, Nvidia is trading at 19.5 times fiscal 2022 revenues and 47.4 times fiscal 2022 earnings. Although not very low, these valuation multiples have declined significantly compared to their highs in November 2021.
Hence, against the backdrop of several secular tailwinds, a solid operational and financial model, and reduced valuation, Nvidia can be a smart pick in 2022.