Shares of Nvidia (NVDA +2.67%) took a big beating on the stock market on Friday last week, falling over 8% after rival chipmaker Advanced Micro Devices (AMD +3.65%) released its preliminary revenue for the third quarter of 2022.
AMD's third-quarter revenue estimate missed the company's original forecast of $6.7 billion issued in August by a wide margin. The announcement sent alarm bells ringing in the semiconductor space, and Nvidia stock bore the brunt of it. The stock is down 60% in 2022 after its latest pullback, and trades at the lower end of its 52-week range.
NASDAQ: NVDA
Key Data Points
There's no doubt that Nvidia stock could head south as a combination of weak PC (personal computer) demand and restrictions on sales of data center chips to China by the U.S. could wreck its financial performance in the near term. But should savvy investors take advantage of the decline in Nvidia stock and buy it so that they can benefit from the company's long-term growth drivers? Let's find out.
Nvidia stock is cheaper than before, but investors can still wait for a better deal
Nvidia is now trading at 39 times trailing earnings following its latest pullback. While that's lower than the company's five-year average earnings multiple of 58, the valuation is still on the richer side when compared to the Nasdaq 100's price-to-earnings ratio of 24.
Given that Nvidia's earnings are expected to drop in the current fiscal year and investor sentiment is likely to remain negative thanks to the weakness in the PC market and the China ban, the stock could head lower. Analysts are anticipating $3.37 per share in earnings from Nvidia this fiscal year, compared to $4.44 per share in the last one. The top line is expected to remain flat at $27 billion.
So savvy investors can get a better deal on Nvidia and wait for the stock to fall further before jumping in. However, investors shouldn't miss the opportunity to buy Nvidia stock at a cheaper valuation, as the company could bounce back strongly.
It is worth noting that Nvidia was trading at just 18 times trailing earnings in 2018 when the weakness in the graphics card market sent its stock packing. The chipmaker's suffering at that time was caused by the oversupply of graphics cards, which hurt its gaming revenue, and it is in a similar situation now.
The stock rallied tremendously for the next three years after recovering from that slump. It wouldn't be surprising to see something similar unfold over the long run, as Nvidia is now sitting on stronger catalysts than it was back in 2018.
Why the stock could recover in the long run
PC sales could decline 12.8% this year as per IDC's estimates. In 2023, IDC forecasts a 2.6% decline in sales of PCs and tablets. The market is expected to return to growth in 2024, indicating that Nvidia's gaming business could remain under pressure next year.
According to another estimate, the combined sales of gaming PCs and notebooks could increase to 49.4 million units by 2025, compared to last year's sales of 45.4 million units. As a result, demand for the graphics cards used in PCs and notebooks for gaming should head higher. Mordor Intelligence estimates that shipments of gaming GPUs (graphics processing units) could increase at a compound annual growth rate of 14% through 2026.
With Nvidia commanding 80% of this market, the company's gaming business could regain its mojo in the future. At the same time, investors shouldn't forget that Nvidia has a huge installed base of users still on older graphics cards that would require upgrading. Throw in the solid prospects in cloud gaming and Nvidia's dominant position in this fast-growing market, and the gaming business looks set for robust long-term growth.
Moving to the data center business, Nvidia pointed out in September that the restriction would impact its revenue by $400 million in the ongoing quarter. The new restrictions brought into force last week, however, are not going to have an additional impact on Nvidia. Additionally, Nvidia CEO Jensen Huang still sees a large market for the company's data center chips in China despite the restrictions.
Meanwhile, the demand for data center accelerators such as graphics cards, central processing units, and data processing units is expected to grow at a solid pace in the long run. The growing adoption of artificial intelligence and machine learning workloads will play a key role in boosting the long-term demand for these data center chips. Not surprisingly, the data center accelerator market could clock 25% annual growth through 2028 and generate annual revenue of $25 billion, according to Global Market Insights.
With Nvidia set to step on the gas in the data center market with new products that will unlock new opportunities for the company, this business could get back on its feet eventually. All the catalysts that Nvidia is sitting on indicate why analysts are expecting the company's revenue growth to get back on track starting next fiscal year.
Also, with an estimated five-year annual earnings growth rate of 23%, Nvidia seems built for impressive long-term growth. That's why investors looking to buy a semiconductor stock for the long run should consider taking advantage of further pullbacks in Nvidia's stock price, as the company's near-term troubles could give way to long-term gains.
