Nvidia (NVDA 0.33%) bears are out in full force this year as the stock has lost a whopping 60% of its value so far in 2022, and the recent developments in the personal computer (PC) and data center markets suggest that the bears will continue to enjoy an upper hand.
From shrinking sales of PCs that have impacted Nvidia's gaming business to restrictions on sales of data center chips to China, the semiconductor giant is facing substantial headwinds right now. The valuation continues to remain a concern despite shares falling steeply this year, especially considering the consistent increment in interest rates by the Federal Reserve to control inflation.
Amid these headwinds, Nvidia bears will argue that the stock's decline isn't over yet. Let's take a closer look at what their arguments might look like.
NASDAQ: NVDA
Key Data Points
What the bears are saying about Nvidia
Nvidia stock trades at a rich 39 times trailing earnings and 10 times sales following its massive decline in 2022. For comparison, the Nasdaq-100 index has a price-to-earnings ratio of 23 and a sales multiple of 2.8, indicating that Nvidia remains overvalued.
The chipmaker will find it difficult to justify this rich valuation, as its growth has hit a wall. The company's fiscal 2023 second-quarter revenue (for the three months ended July 31) was up just 3% year over year to $6.7 billion. Adjusted earnings fell a whopping 51% year over year to $0.51 per share. Nvidia's guidance of $5.9 billion in revenue in the current quarter points toward a 17% year-over-year decline.
Meanwhile, analysts anticipate Nvidia's top line to remain flat in the current fiscal year at $27 billion. They are projecting a 24% drop in the company's earnings. These gloomy projections aren't surprising, as Nvidia's second-largest business -- gaming -- is likely to remain under pressure. The company's gaming revenue was down 33% last quarter, and the projection that PC sales could drop nearly 13% in 2022 means that the demand for gaming graphics cards is likely to remain muted.
Graphics card prices have dropped in recent months thanks to tepid demand and oversupply. Jon Peddie Research estimates that $5.5 billion worth of discrete graphics cards were sold in the second quarter, down by $3.1 billion from Q1, thanks to lower average selling prices and a fall in volumes. Nvidia's graphics card shipments fell 19% quarter over quarter. The sorry situation in the PC market and Nvidia's woeful guidance means that its gaming business may take time to recover.
On the other hand, restrictions on sales of data center chips to Chinese customers could knock the wind out of the sails of its largest business. Nvidia's data center revenue was up 61% year over year last quarter to $3.8 billion. The company has already pointed out that the restrictions could impact its revenue by $400 million, and investors would be hoping that the damage isn't greater when the company releases quarterly results next month.
So, the bearish argument suggests that Nvidia stock could head lower in the short run. But Nvidia bulls may argue that the company is in a solid position to overcome these near-term troubles and soar in the long run.
The bullish argument would focus on the bigger picture
While Nvidia's near-term prospects don't appear to be solid, the bulls would argue that the company can make a robust recovery in the long run. As it turns out, analysts expect a turnaround at Nvidia to start from fiscal 2024 itself. They are anticipating a 13% year-over-year increase in revenue and a 30% spike in earnings.
What's more, the long-term forecast also appears to be good. Analysts are anticipating 23% annual growth in Nvidia's earnings over the next five years. These rosy projections aren't surprising, as Nvidia's two major end markets -- gaming and data center -- are built for long-term growth. The gaming graphics card market, for instance, could clock 14% growth annually through 2026, according to Mordor Intelligence.
Meanwhile, the data center accelerator market is expected to clock faster annual growth of nearly 39% through 2027. As Nvidia is the leading player in both these markets and looking to expand its addressable revenue opportunity with an entry into the server processor space, bulls would say that the gaming and the data center markets would eventually regain their mojo.
It is also worth noting that the automotive, omniverse, and cloud gaming markets could play a massive role in driving Nvidia's growth over the next decade.
What should investors do?
The bullish argument indicates that Nvidia could turn out to be a terrific bet in the long run, but the company will have to navigate the near-term problems it's facing. The stock could head lower until there are concrete signs of a turnaround, which is why it would make sense for investors to wait for Nvidia to drop further before buying it to take advantage of the multiple opportunities that could drive the company's growth.
