With Nvidia (NVDA 0.33%) stock losing 22% of its value since the beginning of December 2021, savvy investors may be wondering if it is a good time to buy shares of this graphics cards specialist whose growth isn't showing signs of slowing down.
NASDAQ: NVDA
Key Data Points
Nvidia finished fiscal 2022 with a 61% spike in revenue to $26.9 billion, and its adjusted earnings increased 78% year-over-year to $4.44 per share, so using the sharp pullback in the company's stock price to buy more shares may look like a no-brainer. However, a closer look at the current stock market scenario may make those investors looking to buy Nvidia a tad jittery. Let's see why that may be the case by focusing on the bear case for Nvidia stock.
The bear case for Nvidia
Nvidia's valuation remains a major concern, despite the stock's massive pullback over the past few months. The company currently trades at 63 times trailing earnings and 23 times sales. While those multiples are lower than last year's average earnings multiple of 90 and sales multiple of 30, they are still on the higher side when compared to the S&P 500's sales multiple of 2.8 and earnings multiple of 30.
This rich valuation strengthens the bear case against Nvidia stock in the current environment, with inflation surging and the Federal Reserve expected to raise the interest rate seven times this year. Higher interest rates and surging inflation are bad news for tech stocks with rich multiples, as they will now be faced with higher borrowing costs that may dent their projected earnings growth.
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Additionally, household budgets could take a hit on account of an increase in the prices of necessary items such as gas and groceries. That could hinder the spending power of customers on discretionary items such as graphics cards, which are used by gamers and creators in personal computers to run high-end games or process resource-intensive workloads such as video editing.
On the other hand, a slowdown in PC sales this year could pose a challenge for Nvidia's GPU (graphics processing unit) demand. IDC estimates that sales of PCs and tablets could drop nearly 5% in 2022 following two years of robust double-digit growth. All of this indicates that Nvidia's terrible run on the stock market may not be over just yet.
However, a closer look at Nvidia's long-term prospects should give the bulls a reason to keep the stock on their watchlists and buy it if it becomes cheaper.
The bull case for Nvidia
There are no signs of a slowdown in Nvidia's business just yet. The company is anticipating $8.1 billion in revenue in the current quarter along with a non-GAAP gross margin of 67%. For comparison, Nvidia reported $5.66 billion in revenue in the prior-year period, while adjusted gross margin stood at 66.2%. So Nvidia's top line is anticipated to jump 43% year-over-year this quarter, which suggests that the company sees strong demand for its chips.
More importantly, GPU demand is expected to rise 10% in 2022 as per third-party estimates. The long-term picture also appears to be bright, as the GPU market is expected to clock 32% annual growth through 2028. Such impressive long-term growth in GPU demand will be driven by the increasing deployment of these chips in PCs, data centers, and other areas such as connected cars and workstations.
Nvidia is in a nice position to ride this growth, as it controls 81% of the discrete graphics card market as per Jon Peddie Research. The company is also a dominant player in the data center market, with a majority of the supercomputers running on its graphics cards. Meanwhile, there are additional catalysts coming into play for Nvidia thanks to emerging tech trends such as the metaverse.
All of this indicates why analysts are projecting Nvidia's earnings to grow at an annual pace of 30% over the next five years.
The verdict
Nvidia's near-term prospects may appear clouded because of factors out of its control, but a look at the bullish argument suggests that the company is built for long-term growth. That's not surprising, as graphics cards play a critical role in accelerating several types of workloads, from artificial intelligence to machine learning to genome sequencing, along with their uses in video gaming applications.
Nvidia's dominant market share in this lucrative market should pave the way for long-term growth and help the stock deliver impressive upside. Assuming Nvidia can clock 30% earnings growth over the next five years as analysts project, its annual earnings would increase to $16.48 per share. Multiplying the projected earnings after five years with Nvidia's five-year average forward earnings multiple of 40 would translate into a stock price of $659, which means that Nvidia stock could rise substantially from its closing price of $247 on March 17.
So investors on the hunt for a growth stock shouldn't miss the opportunity to buy the dips in Nvidia stock, as it has the potential to soar significantly higher in the long run.
