Shares of Nvidia (NVDA 3.71%) were in fine form on the stock market last month, gaining 12% and giving investors some relief after a terrible start to 2022. But, April is turning out to be another poor month for the graphics card specialist.
Nvidia stock is down nearly 20% so far this month, giving up all the gains that it scored in March. The pullback can be attributed to the negative analyst sentiment about the state of the market the company operates in. However, the stock's decline has made it attractive, especially considering the terrific growth that Nvidia has been clocking on a consistent basis.
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Nvidia is available at an enticing valuation right now
Nvidia's recent crash has brought the company's price-to-earnings (P/E) ratio down to 55.8, which is lower than the stock's five-year average earnings multiple of 58.5. It is also worth noting that Nvidia stock is trading at its cheapest valuation since 2019 when it had a P/E ratio of 60. The stock was trading at more expensive levels in 2020 and 2021, hitting earnings multiples of 85 and 90, respectively.
Of course, Nvidia is still expensive as compared to the broader market. The Nasdaq 100, for instance, has a P/E ratio of 31.8. Nvidia bulls, however, could justify this relatively rich valuation given its pace of growth. Following a 61% increase in revenue in fiscal 2022 (which ended on Jan. 30, 2022) to $26.9 billion, Nvidia expects $8.1 billion in revenue in the first quarter of fiscal 2023, which would be a 43% increase over the prior-year period.
Its earnings are expected to jump to $1.29 per share from $0.91 per share in the year-ago quarter. What's more, analysts are expecting Nvidia to finish fiscal 2023 with a 30% growth in revenue to $34.8 billion. So investors looking to buy a fast-growing tech stock may be interested in buying Nvidia, given its sharp pullback. But will this be a good idea? Let's find out.
Wall Street sees headwinds due to weakness in the graphics cards market
Nvidia stock has been the subject of downgrades on Wall Street due to a potential weakness in the demand for consumer graphics processing units (GPUs) used in personal computers (PCs) for video gaming. Investment banking firm Baird points out that sanctions on Russia have led to a slowdown in demand for consumer graphics cards, as the country is reportedly a key buyer of GPUs used by both gamers and cryptocurrency miners.
Baird analyst Tristan Gerra has cut his price target on Nvidia stock to $225 from $360 and lowered his rating from "outperform" to "neutral." Gerra estimates that customers have started canceling GPU orders because of an oversupply in Western Europe and Asia, as well as a slowdown in demand from key markets such as China. As a result, the price of GPUs has started dropping. The analyst believes that lowered graphics card demand could negatively impact the company's revenue in the second half of the year.
Truist is another bank that's predicting a near-term slowdown in the demand for chips that are used in computers and other consumer devices. The bank cut its price target on Nvidia stock to $298 from $347. This negative sentiment could continue to weigh on Nvidia stock and make its valuation more attractive.
However, savvy investors shouldn't forget that Nvidia has solid long-term prospects in multiple markets, which is why it would be a good idea to accumulate the stock on the dips.
Investors need to focus on the big picture
A near-term graphics card oversupply doesn't bode well for Nvidia, considering that gaming is its largest business, producing 46% of its total revenue last fiscal year. But investors shouldn't miss the fact the slowdown is likely to be temporary, as Nvidia stands to gain from a GPU upgrade cycle.
Nvidia pointed out in its 2022 investor day presentation that 71% of its installed base is running graphics cards based on older architectures. More specifically, just 29% of Nvidia's users are on RTX series graphics cards, which were launched in the second half of 2018. The new RTX series cards have brought about huge performance gains over the GTX series cards -- which most of its user base is running.
What's more, gamers who are upgrading to Nvidia's graphics cards based on the latest Ampere architecture are spending $300 more as compared to earlier cards. So, the graphics card upgrade cycle should give Nvidia's video gaming business a nice boost in the long run due to a combination of strong volumes and improved pricing.
Additionally, the company's improving prospects in the automotive market and its dominant position in the booming data center GPU space should ensure that Nvidia remains a top tech stock in the long run.
In all, Nvidia's multiple catalysts make it a stock worth buying on the dip, as the company is expected to report an annual earnings growth rate of 30% for the next five years. However, it won't be surprising to see it do better thanks to the impressive growth drivers it has in several end markets.
