Shares of Nvidia (NVDA 0.95%) have rallied 13% in July thanks to the broader rally in semiconductor stocks, which is evident from the 10% jump in the PHLX Semiconductor Sector index. But Wall Street seems to be apprehensive about the tech giant's prospects.
The graphics specialist has been the subject of downgrades by Wall Street analysts of late, leading to a small pullback in its stock price in recent sessions. So should investors buy Nvidia stock following its pullback and set their portfolios up for long-term gains given the solid catalysts the company is sitting on? Or should they heed analysts' warnings about tough times ahead for the chipmaker and avoid the stock? Let's find out.
Why analysts are worried about Nvidia
Blayne Curtis of investment bank Barclays lowered his price target on Nvidia stock from $295 to $200 a share. Curtis said he believes that the recent rally in semiconductor stocks is going to be short-lived, as companies in this sector could witness big cuts to their earnings estimates in the coming year and a half. Ross Seymore, an analyst at Deutsche Bank, holds a similar view and said he expects the semiconductor industry to remain in decline.
It is worth noting that the sell-off in semiconductor stocks this year has weighed on shares of Nvidia in 2022, with the stock down 39% so far. So the weakness in the semiconductor sector could negatively impact Nvidia's stock market performance. But there is evidence that semiconductor demand remains robust.
The world's largest semiconductor foundry, Taiwan Semiconductor Manufacturing (TSM 0.57%), reported a solid set of second-quarter results on July 14.
The solid demand for chips used in the Internet of Things (IoT), automotive, and high-performance computing (HPC) markets helped the bellwether -- popularly known as TSMC -- increase its revenue by 36.6% over the prior-year period. Earnings increased 67% over the prior-year period to $1.55 per share. What's more, TSMC's forecast for both the short and the long run indicates that its terrific growth is here to stay.
On the other hand, semiconductor equipment manufacturer ASML Holding, which supplies its machines to the major chip foundries in the world, reported a massive increase in its backlog thanks to strong orders for its machines in the second quarter. So the demand for semiconductors could remain healthy, as the latest results from the industry bellwethers indicate.
Also, investors shouldn't forget that Nvidia has been delivering solid results quarter after quarter.
Analysts expect the company to finish fiscal 2023 with a 24% increase in revenue to $33.3 billion. It is expected to deliver impressive double-digit revenue growth once again next year. What's more, consensus forecasts suggest that Nvidia could clock 20%-plus annual growth in its bottom line over the next five years.
But there are quite a few reasons to believe Nvidia could grow at a faster pace. The company's dominant position in graphics cards, which are used in both computers and data centers, as well as the emerging opportunities in other areas such as automotive and digital twins, could supercharge it in the long run.
For instance, the demand for data center accelerators such as graphics cards, server processors, and data processing units is reportedly growing at an annual pace of nearly 37% as per a third-party estimate. Nvidia is the dominant player in data center accelerators, and it has been making moves to increase its addressable revenue opportunity in this space. Similarly, the company sees a lot of potential in the automotive space as well.
All this indicates that Nvidia's long-term prospects are healthy. But should investors buy the stock right now, hoping that it will sustain its recent momentum on the market?
Is the stock a buy?
Nvidia stock is expensive. It trades at 44 times trailing earnings and 14 times sales. The S&P 500, for comparison, has a price-to-earnings ratio of 22 and a sales multiple of 2.4.
However, the stock's forward earnings multiple of 31 points toward robust bottom-line growth. So investors with a higher appetite for risk may consider going long Nvidia stock given its sunny prospects as well as the good health of the semiconductor industry, as discussed above. But those who think that Nvidia is richly valued right now may want to take advantage of any dips in the stock as this tech giant is built for long-term growth.