Nvidia (NVDA -0.01%) is set to release its fiscal 2022 fourth-quarter results (year ended Jan. 31) after the market closes on Feb. 16, and investors will be looking for a solid showing that could help shares of the tech giant regain its mojo after a terrible start to 2022.
Nvidia stock is down 19% so far this year due to a variety of factors ranging from the broader sell-off in tech stocks on account of a hawkish Federal Reserve, surging inflation, and the collapse of the Arm Limited deal that cost the chipmaker $1.3 billion. So, should investors sell Nvidia stock heading into its earnings report on account of the multiple headwinds it is facing right now? Let's find out.
Reasons to sell Nvidia stock
One of the biggest reasons investors may consider selling Nvidia stock is the company's valuation. Trading at 74 times trailing earnings, 46 times forward earnings, and 25 times sales, Nvidia stock isn't cheap compared to the Nasdaq 100 index, which sports a price-to-earnings ratio of 34.
Such a rich valuation makes Nvidia stock susceptible to further declines given the number of interest rate hikes that the Federal Reserve could resort to in 2022. Goldman Sachs estimates that we could see seven quarter-point rate hikes this year. The investment bank was previously anticipating five interest rate hikes this year, but surging inflation may force the Fed's hand and lead to a more aggressive policy.
Not surprisingly, the tech-heavy Nasdaq 100 index is expected to lose more ground this year and fall into a bear market. The Nasdaq 100 Technology sector index is already down over 14% in 2022, and market watchers believe that it could slide further by the end of the year. Additionally, the potential rate hikes will make investments in Treasury bonds more attractive, as they will be yielding higher interest rates, causing richly valued tech stocks such as Nvidia to slide further.
As a result, Nvidia investors may be tempted to hit the sell button right now and avoid any more losses.
Reasons to hold
Nvidia stock has been a fine performer over the past couple of years, rising more than 230% thanks to the robust growth in the company's earnings and revenue. The chipmaker is expected to deliver another solid report with revenue expected to land at $7.4 billion and adjusted earnings at $1.22 per share, which would translate into a year-over-year increase of 48% and 58%, respectively.
Nvidia is set to finish fiscal 2022 with revenue increasing 60% and earnings per share growing 74% over the prior year, indicating that its growth is strong enough to support the rich multiples it is trading at. The company's dominant position in the fast-growing and lucrative video gaming business, as well as the data center graphics processing unit (GPU) market, should help it sustain its impressive growth and outperform the broader market's expectations.
Analysts expect Nvidia's revenue and earnings to increase 18% in fiscal 2023, which would be a big drop from its fiscal 2022 performance. But it won't be surprising to see Nvidia grow faster for a couple of simple reasons.
First, the demand for gaming GPUs is expected to continue increasing in 2022. A third-party estimate forecasts a 10% increase in gaming GPU shipments this year. At the same time, higher input costs and a supply chain shortage will lead to an increase in GPU prices, which could result in higher manufacturer's suggested retail prices (MSRPs) from graphics cards manufacturers. As a result, the discrete GPU market's revenue is on track to head higher in 2022, and Nvidia can make the most of this, as it controls 83% of this space.
Second, the demand for data center accelerators is expected to increase nearly 15% this year, according to Mordor Intelligence, a growth rate that may be sustainable through 2026. Again, Nvidia leads this space with a share of 80% as per market research firm Omdia, and it is expected to strengthen its grip over this space with an improved product portfolio.
So investors who already hold Nvidia stock may continue doing so, as there are no signs of weakness in the company's business, and the prospects of the markets it operates in are solid.
Reasons to buy
Investors looking for a growth stock have a good reason to buy Nvidia right now. Even though the stock is expensive compared to the Nasdaq 100 index, it is substantially cheaper than last year.
Nvidia stock was trading at over 90 times earnings last year, while its forward earnings multiple stood at 57. The company's price-to-sales ratio of 25 right now represents a discount to its 2021 sales multiple of 30. Given that Nvidia is sitting on secular tailwinds in the video gaming and data center businesses, which together produce 87% of its total revenue, the company could deliver stronger-than-expected results and terrific guidance. That could make Nvidia stock relatively expensive.
Throw in Nvidia's prospects in the metaverse and its robust design win pipeline in the automotive business, the company should be able to sustain a high pace of growth over the long run. Analysts expect Nvidia's earnings to grow at a compound annual rate of 39% for the next five years, which means that the stock's recent pullback is an enticing opportunity for growth-oriented investors to go long before its earnings report.