The broad market sell-off has several excellent businesses down significantly from their recent highs. In particular, Nvidia (NVDA -3.33%) has seen its stock price drop by 48%.
The fall, understandably, has many investors asking if it's a good idea to buy Nvidia stock right now. Let's look closer at Nvidia's prospects, balance that with its valuation, and determine if long-term investors should buy now.
Image source: Getty Images.
Nvidia can capitalize on massive opportunities
Nvidia's sales are fueled by several influential market trends, including gaming, artificial intelligence, data centers, autonomous car development, and 5G communication technology. Those forces have propelled its revenue from $4.3 billion in 2013 to $26.9 billion in 2022.
More impressively, the scale has expanded its gross profit and operating profit margin, respectively. The former has grown from 52% to 65% from 2013 to 2022 -- the latter from 15.1% to 37.3% in that same period. Demonstrated economies of scale are a great indicator of a company's ability to grow earnings over time.
NVDA Operating Margin (TTM) data by YCharts
That's a great sign because the trends that have powered growth so far have the potential to continue for several years. One area that can fuel the next leg of revenue growth could be self-driving cars. The segment totaled just $566 million in revenue in fiscal year 2022 (the 12-month period ending Jan. 30) out of the company's $26.9 billion in overall sales. Its processors have primarily been used in a car's infotainment system until this point. For self-driving cars, Nvidia could power the entire software and hardware stack.
Of course, a significant risk with Nvidia in recent years is the use of its chips in the mining of cryptocurrency. The connection correlates sales of those chips to the prices of the digital assets. When prices of cryptocurrencies fall, it could harm the sales of Nvidia's products that support mining. Nvidia's CFO Colette Kress commented on that fact on Feb. 16:
Our GPUs are capable of cryptocurrency mining, though we have limited visibility into how much this impacts our overall GPU demand. Volatility in the cryptocurrency market including changes in the prices of cryptocurrencies or method of verifying transactions, such as proof of work or proof of stake, can impact demand for our products and our ability to accurately estimate it.
Is Nvidia's stock reasonably priced, expensive, or cheap?
NVDA PE Ratio data by YCharts
Despite falling by 48% off its high, Nvidia stock is not cheap. Trading at a price-to-free cash flow ratio of 45 and a price-to-earnings ratio of 54, Nvidia is roughly at its average historical valuation according to the metrics mentioned above. That said, Nvidia is not expensive, either. Investors cannot be faulted for paying a fair price for an excellent business. Nvidia is undoubtedly a great business growing revenue, expanding profit margins, and developing cutting-edge technologies that are difficult to replicate.
For those reasons, yes, Nvidia is an excellent stock to buy now.
