Nvidia (NVDA +3.75%) has seen its share price fall nearly 50% since peaking at $346 in late 2021, but the graphics-chip leader has continued to deliver lots of growth for investors. In the company's fiscal 2023 first quarter, ending May 1, revenue increased 46% year over year driven by record quarterly results from the data center and gaming segments.
The stock rebounded after the news, but Nvidia's guidance shows it's not immune to the problems facing the economy. Revenue growth is expected to decelerate to approximately 25% year over year in the fiscal second quarter. The company expects the COVID-19 lockdowns in China and the Russia-Ukraine war to cut about $500 million off revenue.
Nvidia graphics processors. Image source: Nvidia.
Leaving those issues aside, demand for the company's graphics chips and software systems is tremendous right now, especially in the data center, where growth managed to accelerate off an already high rate in previous quarters.
While it's impossible to know where the stock goes in the near term, the current trends affecting Nvidia's growth could stick around for a long time. There are three reasons that the market dip is a great buying opportunity.
1. Nvidia is buying back shares
Nvidia repurchased $2.1 billion of its stock during the recent quarter. Some companies repurchase shares endlessly, but Nvidia is more diligent with its buybacks. In fact, the company's share repurchases usually precede a subsequent rise in the stock price.
In fiscal 2014, Nvidia repurchased $887 million worth of shares. Over the next three years through the end of 2017, the stock delivered a return of 1,120%. This was during a period when the company was starting to apply its graphics processing technology to enterprise applications, such as the data center and cloud computing. Management clearly saw the growth that was coming and viewed the stock as deeply undervalued.
The company continued to buy back shares through fiscal 2019. It did not repurchase any stock in fiscal 2020, 2021, or 2022, as the shares soared to high price-to-earnings multiples. The $2 billion in buybacks in the fiscal first quarter was the first time the company had bought any shares in three years.
These share repurchases are coming ahead of Nvidia's ramp-up of its next-generation data center graphics chip, the H100, and the 2023 launch of its first-ever central processing unit (CPU) for the data center.
NASDAQ: NVDA
Key Data Points
2. The data center's high growth points to a long runway
As the stock fell, the data center business was accelerating. Its revenue grew 83% year over year, becoming Nvidia's largest revenue contributor in the recent quarter. This was up from the 71% increase in the fiscal fourth quarter and up from 55% in the third quarter last year.
| Nvidia Segment | Fiscal 2023 Q1 Revenue | Change (Decline) QOQ | Change YOY |
|---|---|---|---|
| Data center | $3.75 billion | 15% | 83% |
| Gaming | $3.62 billion | 6% | 31% |
| Professional visualization | $622 million | (3%) | 67% |
| Automotive | $138 million | 10% | (10%) |
| OEM and other | $158 million | (18%) | (52%) |
| Total | $8.29 billion | 8% | 46% |
Data source: Nvidia. Note: Q1 ended May 1. QOQ = quarter over quarter; YOY = year over year.
Nvidia's growth spurt comes on the heels of an increase in the number of data centers being built following the pandemic. Reliance on cloud services has reached all-time highs over the last two years, which is causing the biggest cloud providers -- Alphabet, Microsoft, and Amazon -- to continue spending billions to add capacity. In the earnings report, management said the top workloads it is seeing for graphics processors are recommendation systems, cloud graphics, and natural speech powered with artificial intelligence (AI).
Nvidia is essentially providing the building blocks of AI factories. Management credited demand for its A100 graphics processing units (GPUs) for growth last quarter, and the company is preparing to launch its next-generation data center GPU, the H100, which it claims is the world's largest and most powerful computing accelerator.
3. Nvidia is powering the future economy
Nvidia is the leading provider of GPUs for gaming. Millions of people who play video games on a desktop computer are familiar with the GeForce family of graphics cards. But Nvidia is starting to cement its position as a leading hardware and software provider for AI.
Because AI is becoming the nuts and bolts of how businesses design products and services, CEO Jensen Huang sees not just hundreds of data centers being built over time, but millions. To keep up with competitors, companies from all industries need to invest in speedier computing to deploy services faster, which can only happen close to the end-user.
Considering that Nvidia offers the full stack of solutions for data centers -- including processors, interconnect hardware, software, and applications -- it could grow for many years. Nvidia is serving every industry with advanced computing needs. These industries are worth $100 trillion and include healthcare, financial services, retail, and manufacturing. Management estimates its available market opportunity is only about 1% of the industries it serves right now, but that percentage will grow significantly over the coming decades.
All this adds up to a long-term compounding machine, and you shouldn't try to time your buy and sell points. This is a stock that investors should tuck away and sit on for years.
