Shares of tech behemoth Nvidia Corporation (NVDA +4.32%) have nosedived 43% year to date as part of a broader tech retreat linked to high inflation and the rising interest rate environment. In response to the unfriendly macroeconomic backdrop, the chip maker recently downgraded its previous guidance for second-quarter revenue, which it's set to report after hours on Aug. 24. While its latest financial situation is far from ideal, it's essential that investors steer clear of short-term headwinds and focus on the long-term trajectory of Nvidia's business.
According to Allied Market Research, the global graphics processing unit (GPU) market is forecast to be worth $201 billion by 2027, equal to a compound annual growth rate (CAGR) of 33.6% from 2020. At the moment, Nvidia controls 21% of the market, so it's not incredibly difficult to envision long-term success for the tech giant. With an enterprise value of $417.2 billion today, will Nvidia eclipse a $1 trillion market value in the future? Let's find out.
Image source: Getty Images.
Nvidia faces near-term headwinds
In early August, the company posted preliminary financial results for the second quarter of its fiscal 2023 year. The tech leader now expects to generate approximately $6.7 billion in total revenue in Q2, equal to 3% growth year over year and a 19.2% decline from a quarter ago. The updated guidance comes in well below its previous forecast of $8.1 billion, stating that macro headwinds have temporarily curtailed demand for its gaming products. Its gaming revenue, which is generated primarily through the sale of its GPUs, dropped 33% from a year ago to $2.04 billion.
NASDAQ: NVDA
Key Data Points
Nvidia, like all other companies in the semiconductor industry, is cyclical in nature. In other words, the company tends to outperform during times of economic expansion and underperform during periods of economic contraction. And given that the economy has hit the brakes in recent quarters, it should come as no surprise that the chipmaker is experiencing growing pains. Over the long run, however, the company is poised to benefit from the upward trajectory of the markets that it serves.
According to analysts' estimates from S&P Global Market Intelligence, Nvidia is forecast to generate $95.1 billion in total revenue by fiscal year 2030, indicating a 15.1% CAGR from fiscal 2022. If we assume an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 42%, which is on par with last year, the company would generate an EBITDA of nearly $40 billion. By applying its current enterprise value-to-EBITDA multiple of 33.6, which is below its five-year mean of 48.8, Nvidia's enterprise value would reach $1.3 trillion, equal to 222% upside from its value today.
Should you buy Nvidia stock today?
Don't let near-term challenges derail you from investing in the world-class chipmaker today. In fact, prudent investors can exploit its latest pullback by accumulating the stock at current price levels. There's no doubt in my mind that Nvidia has the potential to eventually eclipse a $1-trillion market value. That's not to say it won't face up-and-down cycles, but over the long run, it should be smooth sailing for the tech juggernaut's business. In my opinion, it's a prime moment to back up the truck and buy Nvidia stock.
