Plenty of tech companies have suffered significant share price declines in 2022 as high inflation has crimped consumer discretionary spending. As a result, the Nasdaq-100 Technology Sector index is down by 34% year to date.
While many companies are feeling the effects of slackening demand for technology, few of their stocks have fallen by as much as Nvidia (NVDA +0.93%). The graphics processing unit (GPU) leader's shares are 55% down since January as investors have responded to a host of headwinds.
In addition to declining sales in the global PC market, Nvidia has had to contend with changes to the cryptocurrency market that significantly decreased demand for its GPUs, as well as a U.S. ban on the export of some of its most powerful chips to China. And yet, despite all of Nvidia's troubles, many analysts continue to recommend its stock, touting it as a bargain.
I concur. Its long-term outlook is more favorable than its share price would have you believe. Let's see why.
A rough year
Nvidia's stock hit an all-time high in November 2021 as the pandemic led consumers to invest in technology for their home offices and upgrades for their gaming PCs. However, 2022 has seen a steep decline in tech demand that has been felt throughout the sector.
September has been particularly rough for Nividia as the cryptocurrency Ethereum converted from a proof-of-work mechanism to a proof-of-stake model. That switch, dubbed "The Merge," fundamentally changed how new Ethereum tokens are generated, removing the need for GPU-powered mining rigs.
Some graphics cards that had been selling for around $1,000 earlier this year lost half of their value overnight as mining of the second-largest cryptocurrency ceased. Many who owned dozens of GPUs that they had used to power their Ethereum mining efforts are now looking to offload the hardware. As Nvidia has a 95% market share of the GPU market, the company will feel a significant loss in demand.
Moreover, the company was hit hard when the U.S. imposed export restrictions on chips to China, one of Nvidia's largest markets. It's too soon to see the revenue impacts yet, but investors are clearly nervous -- the company's share price has fallen by 26% from what it was a month ago on Aug. 20.
To make matters worse, Nvidia unveiled its newest generation of GPUs on Sept. 20, and consumer reception for them was lackluster at best on the back of price hikes. The company raised prices significantly for the newest chips despite the softer conditions in the GPU market; the new RTX 4090 GPU is selling for $1,599, 7% more than the price tag carried by the previous generation, and the RTX 4080 sold at $899, a price hike of 29% from the GPU it replaced.
NASDAQ: NVDA
Key Data Points
Not all hope is lost
Despite its tumultuous year, many analysts continue to recommend Nvidia's stock as a long-term investment. The leader in graphics chips has a huge leg up on the competition. In addition to its majority market share in the GPU industry, the company's chips are key components in the machines responsible for handling more than 90% of all artificial intelligence (AI) workloads in data centers worldwide. The AI market was valued at $93.5 billion in 2021, according to Grand View Research, and is projected to expand at a compound annual rate of 38.1% from 2022 to 2030. That should provide Nvidia with a low-risk growth opportunity.
Moreover, Mizuho Securities analyst Vijay Rakesh believes Nvidia's new "Hopper" series of AI-focused GPUs will not be affected by the U.S. export ban to China, giving them "supply chain freedom" through the region.
Although the GPU market has taken a hit in 2022, Nvidia's market share dominance in the niche gives it a major advantage. Even if sales for its new 4000 series GPUs are dismal, it will continue to sell its 3000 series, which may be more attractive now at their lower prices. Additionally, if a competitor -- such as AMD (AMD +3.36%), which has a line of GPUs coming -- tries to undercut Nvidia, not a lot would stop it from discounting its 4000 series to stay competitive. The company has plenty of options with the control it holds over the market.
Is now the best time to invest in Nvidia?
Nvidia has made numerous headlines over the last couple of years as its stock reached all-time highs and disappointing lows. Significant changes in crypto mining, U.S. legislation, and a new line of GPUs have all contributed to its slumping stock price. However, none of that has stopped investors such as Cathie Wood from loading up on Nvidia; her Ark Invest exchange-traded funds have added more than 400,000 shares of the chipmaker this month.
Nvidia has suffered in 2022, but its long-term outlook remains positive. It continues to be a leader in graphics, and its venture into AI is likely to pay off in a big way down the road.
