2022 has been a challenging year for Nvidia (NVDA -1.44%) so far. Despite rising sales and profits, its stock is trading down almost 37% year to date. The company is on the leading edge of technology that powers gaming, data centers, and autonomous driving, but investors are worried about whether it can maintain its strong showing over the short term as macroeconomic factors are affecting management forecasts.
Let's take a closer look at Nvidia, especially one green flag and one red flag regarding its potential as an investment, and see if either is more important to its future.
Image source: Getty Images.
Green flag: Gaming revenue
In its fiscal year 2022, which ended on Jan. 30, Nvidia generated $12.5 billion in revenue from the products in its gaming division. That was a meaningful increase from the $7.7 billion in revenue the segment earned in fiscal 2021. Nvidia holds the top position in the personal computer gaming market with over three times the revenue of the next biggest competitor. Nvidia boasts of having more than 200 million gamers using its GeForce graphic processing units (GPUs) in their computers.
The growth in Nvidia's gaming division is not restricted to this most recent fiscal year. Over the last five years, it has grown revenue at a compound annual rate of 25%. Those sales may have been even higher if Nvidia could have produced the number of chips gamers desired. Its GPUs are regularly sold out at retailers and are selling at premium prices on third-party reseller sites like eBay.
NVDA Revenue (Annual) data by YCharts
Gaming was a $156 billion industry in 2020, according to Statista, and is expected to grow to $269 billion by 2025. The gaming industry is bigger than the movie industry and the North American Sports industry combined. In fact, video gaming is a growing spectator sport.
That's a good sign for shareholders as Nvidia's gaming segment generated 46% of overall revenue in fiscal 2022. A dominant share in a large and growing market is a green flag for Nvidia.
Red flag: Cryptocurrency price crash
Nvidia's graphic processing units are capable of cryptocurrency mining and its sales growth fluctuates with the interest in mining digital assets which fluctuates with the price of those assets. Cryptocurrencies are down significantly in 2022 and roughly $1 trillion of value has been shaved from cryptocurrencies overall since hitting their peaks in 2021. The dramatic fall has lessened the enthusiasm of would-be miners. Nvidia's CFO, Colette Kress, discussed the trend in its fiscal first-quarter 2023 earnings release: "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 -- such as the recent declines in cryptocurrency prices or changes in method of verifying transactions, including proof of work or proof of stake – can impact demand for our products and our ability to accurately estimate it."
Some investors had used cryptocurrencies as a hedge against inflation, but with the Federal Reserve raising interest rates to combat rising inflation, other options like bonds have become more viable and created competition and potentially created a sell-off in crypto. Regardless of the real reason, depressed crypto values are likely to affect the enthusiasm for cryptocurrency mining and reduce demand for Nvidia's processing products. This could be a red flag for Nvidia for the rest of the calendar year.
NVDA Price to Free Cash Flow data by YCharts
Nvidia's red flag is taking center stage in 2022, contributing to the 36% stock price drop year to date. That has created an opportunity for long-term investors to buy Nvidia at a price-to-earnings and price-to-free-cash-flow ratio of 50 and 60, respectively. The stock is reasonably priced by historical standards. Considering its excellent long-term prospects, it wouldn't be a bad idea to pay a fair price for Nvidia stock right now.
