Nvidia (NVDA +2.33%) stock has shown some signs of life on the market over the past couple of weeks following a terrible time so far in 2022, and the company's resurgence can be attributed to its fiscal 2023 first-quarter results that were released on May 23.
The graphics specialist had reported terrific growth thanks to the strength of its data center and video gaming businesses last quarter. What's more, Nvidia's guidance indicates that its impressive growth is here to stay despite the challenges it is going to face in the near term thanks to macroeconomic headwinds.
NASDAQ: NVDA
Key Data Points
So, should investors now start buying Nvidia as shares of the chipmaker are still down more than 42% so far this year? Let's find out.
The valuation has become attractive
Nvidia is now trading at 45 times trailing earnings, which is quite rich when compared with the Nasdaq-100's earnings multiple of 26.5. But the multiple is cheap when compared with Nvidia's five-year average earnings multiple of 59.
Also, the company's forward price-to-earnings ratio of 34 indicates that its bottom line is on track to increase nicely in the next year. What's more, analysts are expecting Nvidia's earnings to clock a compound annual growth rate of nearly 23% over the next five years.
This consistent growth that Nvidia is expected to deliver explains why the stock carries a rich multiple despite its crash in 2022. What's more, it won't be surprising to see Nvidia's earnings grow at a faster pace than what analysts are forecasting. Let's see why.
Nvidia is a top pick for growth investors
The data center business became Nvidia's largest source of revenue last quarter. The segment produced $3.75 billion in revenue, which was an 83% increase over the prior-year period and accounted for 45% of the company's top line.
Nvidia management says healthy demand from hyperscale and cloud computing customers sent the data center business soaring last quarter, and the good part is that the company expects the momentum to continue. Nvidia is pushing the envelope in the data center market with the launch of new chips, such as its latest H100 data center graphics processing unit (GPU).
Based on the new Hopper architecture, the new H100 GPUs are reportedly much faster than their predecessors. They are expected to train massive workloads in just 20 hours, compared with the week the H100's predecessor used to take. Not surprisingly, major cloud computing players such as Amazon, Alibaba, Baidu, Microsoft, Alphabet, Oracle, and Tencent already plan to offer H100-based cloud services once the platform goes on sale in the third quarter of 2022.
Meanwhile, Nvidia's Grace central processing unit (CPU) Superchip that's expected to go on sale in the first half of 2023 is going to unlock an untapped opportunity for the chipmaker. That's because Nvidia has yet to enter the market for data center CPUs, where Advanced Micro Devices and Intel are currently the dominant players. Third-party estimates indicate that data center CPUs and GPUs are expected to clock 42% annual growth through 2027, so it won't be surprising to see Nvidia witnessing healthy growth in data centers in the long run.
Meanwhile, Nvidia is looking to push the envelope further in the gaming business, which was its second-largest business last quarter with $3.62 billion in revenue. The segment's revenue had increased 31% year over year, driven by Nvidia's robust share of this space. Nvidia controlled 78% of the discrete GPU market in the first quarter, according to Jon Peddie Research, and the launch of the RTX 40 series cards later this year could help it sustain its impressive market share.
Nvidia is expected to launch its new GPUs in the third quarter, and the grapevine indicates that they could be significantly more powerful than the company's current offerings. The tech giant's ability to hold on to its share of the discrete GPU market should ensure healthy growth of its gaming business in the long run, as this space is expected to generate $54 billion in revenue by 2025, compared with $23.6 billion in 2020, according to Jon Peddie Research.
In all, the two massive growth drivers in the form of the data center and the video gaming businesses, as well as the new catalysts that are coming into play for Nvidia, should help the company sustain its eye-popping growth in the long run. As such, Nvidia looks like an enticing bet for investors looking to buy a growth stock following its severe decline in 2022, as it may become more expensive in the future thanks to the multiple catalysts it's sitting on.
