Nvidia (NVDA 3.65%) has been a red-hot growth stock over the years that has given investors' portfolios a big boost, driven by terrific demand for its graphics cards, which have seen rapid adoption across several applications and industries.
The tech giant's ability to deliver eye-popping revenue and earnings growth has helped it outpace broader indexes such as the S&P 500 quite easily despite periods of volatility, as evident from the chart below.
The 3,600%-plus return that Nvidia has delivered since Jan. 1, 2015, means that a $1,000 investment in the stock on that date is now worth more than $37,000. For comparison, the S&P 500 nearly doubled over the same period. It is worth noting that Nvidia faced tough times in 2018 and 2022, but its overall performance has been solid enough to multiply investors' initial investment several times, if they held on.
However, shares of Nvidia have dropped 40% in the past six months, and it is trading at a much more reasonable valuation now as compared to where it was last year. Does this mean investors should buy Nvidia stock now and expect it to deliver similar returns in the long run? Let's find out.
Is now a good time to buy Nvidia stock?
Nvidia is currently trading at 50 times trailing earnings, which represents a discount to its five-year average earnings multiple of 58 and 2021 earnings multiple of 90. However, Nvidia was trading at just 30 times in 2015. But a closer look indicates that Nvidia's rich valuation is justified right now.
The company finished fiscal 2015 (the year ended Jan. 25, 2015) with $4.7 billion in revenue, an increase of 13% over the prior year. In fiscal 2022, Nvidia's revenue jumped 61% year over year to $26.9 billion. The chipmaker has started fiscal 2023 on a solid note as well, reporting a 46% year-over-year increase in revenue in the first quarter.
Nvidia's addressable revenue opportunity has grown at a red-hot pace over the years, and the company has done well to capitalize on that. According to one estimate, the size of the global graphics processing unit (GPU) market increased from just $8 billion in 2015 to $23 billion last year, thanks to the growing demand for these chips in computers for video gaming and content creation.
Nvidia sold $12.5 billion worth of PC (personal computer) graphics cards last year, which means that it has cornered a nice share of this market. Global GPU sales are expected to hit $35 billion in 2025, and Nvidia can be expected to maintain its leadership position in this space thanks to a large installed base of users in an upgrade window as well as the company's product development moves.
But the more important thing to note is that Nvidia is now more than just a supplier of PC graphics cards. The adoption of GPUs in the data center to accelerate computing workloads has been a big growth driver for Nvidia in the past few years. The GPU business was Nvidia's biggest source of revenue in Q1 fiscal 2023. The segment's revenue jumped 83% year over year to $3.75 billion and accounted for 45% of the top line.
Gaming, on the other hand, produced $3.62 billion in revenue and was up 31% year over year. This indicates that Nvidia now has two solid catalysts and there are lucrative opportunities in other emerging areas that could lead to terrific revenue and earnings growth in the long run,.
New catalysts can supercharge the chip giant's growth
The data center business was yet to become a critical growth driver for Nvidia in 2015, and the same can be said about the company's automotive and professional visualization businesses right now.
Last quarter, the automotive business produced $138 million in revenue and accounted for just 1.7% of Nvidia's top line. Revenue from this segment was down 10% year over year, but don't be surprised to see the automotive business step on the gas in the long run.
Image source: Getty Images.
The chipmaker pointed out on its May earnings conference call that it "has great traction in the marketplace with over 35 customer wins from automakers, truck makers, and robotaxi companies." What's more, Nvidia has a design win pipeline of $11 billion in the automotive business that spans a six-year period, which means that its chips have been selected for deployment by automotive companies in their applications. As these design wins move into actual production, Nvidia's automotive business should start gaining critical mass.
Meanwhile, the professional visualization business has already started picking up. Revenue from this segment was up 67% year over year to $622 million last quarter, accounting for 7.5% of the top line. The chipmaker is witnessing strong traction in this business thanks to the growing demand for graphics cards used in workstations, as well as the demand for its Omniverse platform that's allowing companies to make 3D models and digital twins, which are expected to gain traction on account of emerging tech trends like the metaverse.
All this indicates that Nvidia can grow at a terrific pace in the next seven years as well, since it will be able to tap multiple growth markets. That's why it may be a good idea to buy now.
