For the past decade, buying shares of Nvidia (NVDA +2.02%) when it dips has been a winning investment strategy. Some unusually challenging market conditions have put the graphics chipmaker through the wringer this year, though, and investors are getting nervous.
Is Nvidia's latest dip part of a much longer slide? Or does this legendary stock's growth story have more exciting chapters ahead?
NASDAQ: NVDA
Key Data Points
Challenging market conditions
A couple of weeks before releasing results from the fiscal second quarter that ended on July 31, 2022, Nvidia told investors to expect just $6.7 billion in total revenue instead of the $8.1 billion windfall management had forecast just a few months earlier. Nvidia was true to its word and reported total revenue that fell 19% from the previous three-month period.
Gamers and cryptocurrency miners buy chips sold by Nvidia's gaming segment. At least one of these groups is less enthusiastic about buying new graphics cards than it was several months ago. Gaming revenue that came in at $2.04 billion was down 33% from the previous-year period and 44% from the previous quarter.
A cryptocurrency crash isn't the only headwind facing Nvidia at the moment. Decelerating enthusiasm for the metaverse kept revenue from the company's professional visualization segment down to just $496 million. That was 4% less than the previous quarter and 20% less than the previous-year period.
Reasons to buy
Selling silicon has always been a cyclical business. The crypto winter is making this downswing particularly dramatic but it isn't anything Nvidia can't overcome.
Nvidia is spending an annualized $7 billion on research and development in an ambitious attempt to secure leading shares of a diverse list of markets it thinks could be worth a combined $1 trillion annually. With an increasingly diverse operation, when one segment falls there's another growth driver to pick up the slack.
Nvidia's fledgling automotive business added $220 million to top-line revenue, which was 59% more than the previous quarter. This segment will most likely continue surging. In March, the company announced a huge partnership deal with BYD, the world's second-largest electric vehicle maker that grew the company's automotive pipeline to $11 billion.
Think long term
Despite falling about 41% this year, shares of Nvidia are still trading at a sky-high valuation of 46 times trailing earnings, and those earnings just declined dramatically. If Nvidia's bottom line slumps further in the next couple of quarters, nervous investors could quickly pull the stock down a lot further.
NVDA Net Income (Quarterly) data by YCharts
We don't know if Nvidia will lower its outlook further the next time it reports. The important thing to remember is that this company will more than likely remain on top in the business segments that it's already succeeding in. Collapsing cryptocurrency prices are causing a temporary lull in demand for graphics processors, but this market is still growing when viewed on a longer timeline.
Nvidia continues to benefit from a strong network effect. Developers of machine learning applications that rely on the parallel processing power they get from graphics processors are nearly always familiar with Nvidia's software development kit (SDK). When different industries, such as automotive, find a reason to employ machine learning application developers, demand for Nvidia's products inevitably follows.
There's no telling if the steep downturn the company is going through will improve by the end of the year. On a much longer timeframe, though, Nvidia's pivotal role in most machine learning applications will return the bottom line to growth. This is still a great stock to buy, as long as you're willing to hang on for the long run.
