Is It Too Late to Buy Nvidia Stock?

Nvidia (NVDA -3.33%) posted its first-quarter earnings report on May 25. The chipmaker's revenue rose 46% year over year to $8.29 billion, which beat analysts' expectations by $190 million. Its adjusted net income increased 49% to $3.44 billion, or $1.36 per share, which also cleared the consensus forecast by seven cents.

Nvidia's stock price advanced slightly after that big earnings beat, but it's still down about 36% for the year. Is it too late to buy Nvidia as a turnaround play in this turbulent market?

Why the market turned against Nvidia

Nvidia stock closed at an all-time high of $333.76 last November, which gave the chipmaker a market cap of $834 billion. At the time, many investors thought it would become a trillion-dollar chipmaker.

Image source: Getty Images.

Nvidia's growth rates supported that bullish thesis. Its revenue rose 61% to $26.9 billion in fiscal 2022, which ended this January, and its adjusted EPS surged 78%. However, most of that growth was driven by its sales of higher-end GPUs for gaming PCs and data centers.

Both markets benefited from stay-at-home tailwinds throughout the pandemic, as more people upgraded their PCs and accessed cloud-based services. Cryptocurrency miners also purchased Nvidia's GPUs to mine Ethereum, Dogecoin, and other coins.

But as the lockdown measures were relaxed, sales of PCs cooled off as more people physically returned to work and school. Its $40 billion bid to buy Arm Holdings, which would have diversified its portfolio with a higher-margin licensing business, also fell through earlier this year.

Meanwhile, rising interest rates sparked a retreat from riskier assets like cryptocurrencies, and the market's interest in Nvidia's mining chips waned.

That bearish sentiment also triggered a broad sell-off in higher-growth tech stocks like Nvidia and its rival Advanced Micro Devices (AMD -0.35%). All those headwinds reduced Nvidia's market cap to about $470 billion today.

Was the slowdown that bad?

During the first quarter, Nvidia generated 44% of its revenue from gaming chips and 45% of its revenue from data center chips. The rest mainly came from its professional visualization, automotive, and OEM chips.

Over the past year, its sales of gaming GPUs (which are also used to mine cryptocurrencies) decelerated significantly as PC sales slowed down. However, its data center business, which sells high-end GPUs for processing machine learning and AI tasks, continued to grow like a weed.

Data source: Nvidia. YOY = Year over year.

But for the second quarter, Nvidia expects its revenue to increase about 24% year over year (but fall 2% sequentially) to $8.1 billion.

Excluding an estimated $500 million impact from the Russo-Ukrainian war and the recent COVID-19-related lockdowns in China (consisting of $400 million in gaming sales and $100 million in data center sales) in the second quarter, its revenue would still only rise 32% year over year and 4% sequentially.

Nvidia expects its gaming GPU sales to decline sequentially in the second quarter, which would represent the segment's first sequential decline since the first quarter of fiscal 2021. During the conference call, CFO Colette Kress predicted that decline would offset its "strong sequential growth" in the data center and automotive markets. Analysts expect Nvidia's revenue to rise 26% this year, and grow 17% in fiscal 2024.

Stable margins and shareholder returns

Nvidia's revenue growth is decelerating, but its gross and operating margins continue to expand on a non-generally accepted accounting principles (non-GAAP) basis.

Data source: Nvidia. Non-GAAP basis.

During the conference call, Colette Kress said Nvidia had been "able to offset rising costs and supply chain pressures," and that its gross margins should expand over the long term as "new products ramp and software becomes a larger percent of revenue." Kress also said the company was "closely managing" its "operating expenses to balance the current macro environment with our growth opportunities."

Nvidia expects its non-GAAP gross margin to come in at a midpoint of 67.1% in the second quarter, even as it grapples with the slower growth of its gaming business and the macro headwinds in Russia and China. Analysts still expect its adjusted EPS to grow 23% this year and 19% in fiscal 2024.

As Nvidia's hypergrowth period ends, it's pouring more of its cash into buybacks. It spent $2 billion on buybacks in the first quarter and increased its current buyback authorization to $15 billion through December 2023.

But is Nvidia's stock still worth buying?

Nvidia still trades at about 30 times forward earnings and 14 times this year's sales. AMD, which faces many of the same challenges, trades at 23 times forward earnings and six times this year's sales.

Therefore, Nvidia isn't a screaming bargain yet. It's still not too late to buy Nvidia as a long-term investment, but investors should expect it to generate tepid gains this year before its next growth cycle kicks off.