Share prices of Nvidia (NVDA 3.46%) have been falling in recent months as high-growth stocks have come under pressure. After a boom in consumer electronics spending since the start of the pandemic, worry has started to mount that demand will start to cool off this year. Analyst Tristan Gerra at Baird Capital recently downgraded Nvidia stock on this specific concern, noting that the market may not be fully appreciating the negative economic effects of Russia's invasion of Ukraine and a potential decrease in demand for Ethereum (ETH 1.41%) cryptocurrency mining later this year.
But Nvidia is a long-term investment. Demand for its chips will ebb and flow, especially in its mostly consumer-facing video game segment. I believe this recent decline in share price is more a long-term opportunity than it is a reason for worry.
Image source: Getty Images.
2018 all over again?
This is not Nvidia's first ride on the demand rollercoaster. The myriad of worries that are likely to douse white-hot consumer demand for Nvidia's GPUs might be a fresh-looking story, but we've seen this plot point before. In fact, what happened 2018 could hold some keys to what might be about to go down.
As a refresher, demand for semiconductors started to cool late in 2018. A trade war between the U.S. and China exacerbated this. Bitcoin, Ethereum, and other crypto prices also tanked in value as the Federal Reserve tightened its monetary policy. Since GPUs are used to mine cryptocurrencies, falling crypto prices lowered demand for GPUs, which negatively impacted NVIDIA's revenue. All told, Nvidia's stock price was more than halved from its high-water mark by the time 2018 was over, a value it wouldn't reclaim until after the pandemic started.
Data by YCharts.
Fast forward to 2022, and a repeat could be in store. Eastern Europe is in turmoil, and that could lower consumer demand for PCs. Some supply and demand balance is starting to return in some areas of the chip industry as GPU production starts to catch up with consumer purchases. And Ethereum is undergoing changes this summer that will transform it from a proof-of-work to proof-of-stake crypto. The changes will alter the rewards for Ethereum miners, which could also reduce demand for Nvidia retail GPUs.
With these various pressures mounting, Nvidia stock is now 30% down from its all-time high reached late in 2021.
Things have changed a little bit
Back in 2018 (which corresponded to Nvidia's fiscal 2019), revenue was up 21% year over year to $11.7 billion. The video game segment represented 53% of total sales, and data centers were 25%.
Just three years and a global pandemic later, Nvidia just reported fiscal 2022 revenue of $26.9 billion, a 61% year-over-year increase. The video game segment was 46% of total sales, and data centers were 39%. Sure, the video game segment could be in for a reckoning later this year or next, but the company has a lot more going for it than it did a few years prior.
Nvidia's enterprise customers are rapidly adopting GPUs in their data centers to accelerate AI, and this growth segment could help dampen a potential blow from consumer PCs and crypto weakness. Plus Nvidia has fresh semiconductors addressing a larger share of the data center market than ever before, and also has an unknown amount of recurring software subscription revenue from Omniverse (remote collaboration and design) and Drive (autonomous vehicles) it didn't have a few years ago.
Nvidia is a more resilient company today, one with many years of growth ahead of it thanks to the AI movement and related software. Granted, this is fairly reflected in the current valuation. The stock trades for 68 times trailing 12-month free cash flow as of this writing, a premium that matches or slightly exceeds peak 2018 Nvidia valuation -- even after shares declined 30% in recent months.
As I see it, there are two options for bullish Nvidia investors:
- Buy (or buy more) now with the expectation this will be a much larger company a decade from now, but face further downside risk if consumer demand dries up more than expected.
- Wait to see if the stock drops further before buying, but face the risk the cyclical low point for Nvidia is actually already priced in and the stock rallies from here.
For me, Nvidia is a "forever stock." I plan on holding for the indefinite future as this semiconductor leader rides multiple secular growth trends. Over the years, my timing on purchasing Nvidia shares has been less than perfect, but my returns are way above my portfolio average. With worry starting to take hold among stock market participants, I remain a buyer here for the very long haul.
If you follow suit, know that it would come as no surprise to me if Nvidia shares were down by another double-digit percentage a month or a year from now. But barring any fundamental change in the business or ultra long-term trajectory, I'd still be buying then too.
