Nvidia (NVDA 1.45%) posted a strong fourth-quarter earnings report on Feb. 16 that beat analysts' expectations on the top and bottom lines. However, the chipmaker's stock slumped after the announcement, and remains down roughly 20% for the year.
Does the market's apparent lack of interest in Nvidia represent a good buying opportunity? Let's review the bear and bull cases to find out.
What the bears will say about Nvidia
The bears will claim Nvidia's growth is decelerating, its gross margins are approaching a near-term peak, and its stock still looks richly valued.
Nvidia's revenue rose 61% to $26.91 billion in fiscal 2022, which ended this January, accelerating from its 53% growth in fiscal 2021. Its adjusted earnings per share (EPS) jumped 78% in fiscal 2022, which also accelerated from its 73% growth in fiscal 2021. On a generally accepted accounting principles (GAAP) basis, its EPS rose 123% in 2022.
That explosive growth was mainly driven by the expansion of its gaming and data center GPU businesses. Nvidia expanded its market share in the discrete GPU market against AMD (AMD 0.09%) over the past year, and shipped a steady supply of top-tier GPUs to data center customers to process complex machine learning and artificial intelligence (AI) tasks.
However, Nvidia expects its revenue to grow 43% year over year in the first quarter of 2022, and analysts expect its revenue to rise 28% to $34.6 billion for the full year as its EPS grows 14% on a GAAP basis. Its GAAP earnings will include a $1.36 billion writedown related to its failed attempt to buy the U.K. chip designer Arm Holdings from SoftBank (SFTB.Y 0.63%).
Nvidia faces tough year-over-year comparisons against the pandemic, which generated tailwinds for the gaming and data center markets, as well as ongoing supply chain constraints. The volatile cryptocurrency mining market will likely cause additional pricing and supply issues for its GPUs and dedicated cryptocurrency mining chips in fiscal 2023.
Nvidia's adjusted gross margin expanded from 62.5% in fiscal 2020 to 65.6% in fiscal 2021, then rose again to 66.8% in fiscal 2022. But for the first quarter, it expects to generate an adjusted gross margin of 67% -- which would remain flat sequentially from the fourth quarter. That forecast suggests Nvidia's near-term gross margins are peaking.
At $236 per share, Nvidia's stock trades at 54 times forward earnings and 17 times its fiscal 2023 sales. Those valuations are still a bit high relative to its near-term growth. By comparison, AMD -- which is expected to grow its revenue and earnings by 56% and 43%, respectively, this year -- trades at 28 times forward earnings and seven times its fiscal 2022 sales.
What the bulls will say about Nvidia
The bulls believe Nvidia's stock is still worth buying because it's well-poised to profit from the secular expansion of several high-growth markets.
As the world's top supplier of high-end gaming GPUs, Nvidia will likely benefit from the growth of the global computer gaming market, which Report Ocean expects to expand at a compound annual growth rate (CAGR) of 14.9% between 2021 to 2027.
The global data center accelerator market, which Nvidia leads with its high-end GPUs, could also grow at a CAGR of 36.7% between 2021 and 2026, according to Research and Markets. Nvidia also provides Arm-based CPUs for data centers, which could eventually challenge Intel and AMD's x86-based data center CPUs over the next few years.
Nvidia also supplies Tegra CPUs for Nintendo's Switch consoles, set-top boxes, and connected cars, as well as onboard computers for driverless cars. These smaller businesses could expand over the long term and diversify Nvidia's core business away from gaming and data center GPUs.
All those tailwinds suggest that Nvidia could grow its annual revenue at a CAGR of at least 20% over the next decade. If it stays above that threshold, it could generate nearly $120 billion in revenue by fiscal 2030. The bulls will claim those long-term growth rates justify its current valuations.
Lastly, the bulls will point out that Nvidia already generates much higher gross margins than other fabless chipmakers like AMD (48% in fiscal 2021) and Qualcomm (58% in fiscal 2021). Therefore, it might not be surprising (or a red flag) if Nvidia's gross margin "peaks" in the high 60s.
Which argument makes more sense?
I believe Nvidia is still a rock-solid investment. However, I believe its decelerating growth, high valuations, and the unpredictable macro headwinds -- which are causing investors to favor value over growth -- could cause investors to shun its stock for at least a few more quarters.