Nvidia (NVDA 1.49%) executed a four-for-one stock split on July 20 of last year, and shares of the graphics specialist have had mixed fortunes on the market since then. Initially, Nvidia enjoyed an impressive post-split rally. However, the sell-off in technology stocks has since sent Nvidia packing with its shares losing 44% of their value so far this year.
Yet, savvy investors should focus on the bigger picture. Nvidia's drop offers an enticing opportunity to buy a stock that could fly higher in the long run. Let's look at the reasons why this stock-split play is worth buying now.
The valuation is enticing
When Nvidia split its stock in July last year, it was trading at more than 90 times trailing earnings. Investors can now buy the stock at less than half that valuation.
NVDA PE Ratio data by YCharts
Nvidia's price-to-earnings (P/E) ratio may appear expensive when compared to the NASDAQ-100's earnings multiple of 23. But investors should note that it is available at a discount when compared to its five-year average earnings multiple of 58. What's more, Nvidia's sales multiple of 13.6 is also lower than the five-year average of 17.
The last time Nvidia was available at its current valuation was more than two years ago when the outbreak of the novel coronavirus pandemic sent the stock market sharply downard. The graphics specialist went on a solid bull run after that before it lost its wheels in 2022.
NVDA PE Ratio data by YCharts
So Nvidia's valuation seems quite attractive right now, and investors may want to grab this opportunity to buy the stock given its bright prospects.
Nvidia's catalysts point toward terrific growth
Nvidia's fiscal 2023 first-quarter results weren't received well by investors as the company pointed out that its top line would take a $500 million hit in the current quarter due to Russia's invasion of Ukraine and lockdowns in China. Still, Nvidia's top line is on track to increase 24% year-over-year in the current quarter.
What's more, Nvidia's growth should pick up the pace in the latter half of the year as its new graphics cards hit the market. Nvidia estimates that only a third of its installed base of graphics cards users have made the jump to its latest generation of RTX series graphics cards that support technologies such as ray tracing and resolution enhancement. Nvidia's next-generation cards are expected to perform twice as better as its current offerings.
More importantly, the company is confident of improved graphics cards availability in the second half of the year. As such, Nvidia's gaming business should step on the gas following a near-term hiccup once it launches its new products. What's more, the long-term prospects of the gaming GPU market appear to be solid. Mordor Intelligence forecasts 14% annual growth in this segment through 2026, and Nvidia is in a solid position to tap this growth as it controls a 78% share of this space.
Meanwhile, the data center business that's currently delivering outstanding growth should get even better from next year with the launch of new products. The company recorded 83% year-over-year growth in this segment last quarter to $3.75 billion. Nvidia is set to expand its addressable market in data centers with the launch of a server CPU (central processing unit) called Grace.
The chipmaker says that systems based on the Grace chip should hit the market in the first half of 2023. This is an untapped market for Nvidia, as it doesn't sell a server processor yet. So the launch of the Grace platform will give Nvidia entry into a niche that could be worth $52 billion by 2026 and accelerate its data center growth.
All in all, it is easy to see why Nvidia stock carries a median price target of $250 over the next year -- which points toward a 54% upside from current levels -- and it could keep going higher for a long time. This is why investors looking to add a technology stock to their portfolios right now should consider taking advantage of Nvidia's sharp pullback and buy this beaten-down chipmaker before it goes on a bull run.
