The semiconductor industry is prone to booms and busts. But over the long term, the best chip companies can deliver fortune-building returns to their investors.
Nvidia (NVDA 3.71%) has done just that. Even after its recent pullback, the chip leader has delivered returns of more than 170% to its shareholders over the past five years, easily besting the returns of the S&P 500 broad market index over that time.
With so much growth still ahead for the chip industry, could the over 50% decline in Nvidia's share price in 2022 be the buying opportunity investors have been waiting for?
The bull case for Nvidia's stock
Nvidia's graphic processing units (GPUs) are helping to power multiple technological trends. From cloud computing to gaming to the metaverse and autonomous vehicles, the semiconductor leader's chips and software are driving the expansion of massive markets -- and making entirely new industries possible.
Nvidia's entrenched position within the tech world is driving the growth of its sales and profits, both of which have more than tripled over the past five years.
NVDA Revenue (TTM) data by YCharts
Better still, much more growth likely lies ahead. Management sees the company's metaverse-building initiatives, which Nvidia refers to as its Omniverse platform, as a $150 billion opportunity alone. Combined with massive markets for chips and systems ($300 billion), automotive technology ($300 billion), artificial intelligence software ($150 billion), and gaming ($100 billion), Nvidia pegs its total addressable market at a staggering $1 trillion.
Risks for investors to consider
Despite these outstanding long-term growth prospects, Nvidia is facing some significant near-term challenges. The personal computer (PC) market has suffered a marked downturn in recent months, with shipments dropping 15% in the third quarter, according to market intelligence provider IDC. Declining PC sales are resulting in lower demand for the chips that power them.
Moreover, the slowdown in semiconductor demand could be spreading to the data center market. Nvidia's data center sales surged 61% year over year to $3.8 billion in the second quarter, but they were up only 1% from the first quarter.
Still, Nvidia has weathered these cycles before. It has survived the boom and bust in cryptocurrency-related chip sales in recent years and numerous other market downturns before that. And while painful, the current downturn is unlikely to be long-lasting due to the favorable long-term growth drivers of semiconductor demand discussed earlier.
Nvidia's investors should be more concerned with mounting competition from Advanced Micro Devices. AMD is now an even more formidable foe following its acquisition of programmable chip specialist Xilinx in February. AMD has been gaining share in the laptop and server markets in recent quarters, according to Mercury Research. If those trends continue, Nvidia's sales and profits could fall short of investors' lofty expectations.
Nvidia's valuation is now more reasonable
After its steep decline this year, Nvidia's stock is much more attractively priced -- but arguably still not cheap. Its shares trade for about 41 times analysts' earnings estimates for fiscal 2023. That figure drops to less than 32 times Wall Street's profit projections for Nvidia in fiscal 2024. For context, analysts expect Nvidia to grow its earnings per share by more than 23% annually over the next five years, according to Yahoo! Finance.
Still, looking further ahead, Nvidia could be undervalued if it can make steady progress toward its massive $1 trillion market opportunity. Its market capitalization currently stands at roughly $345 billion.
So, is Nvidia's stock a buy?
The company is striving to serve some of the most exciting growth markets in the world today. Competition is intensifying, but there will likely be more than one winner in the global semiconductor industry. Nvidia is well-positioned to be one of them.
Investors who want to capture some of the chip leader's awesome growth potential could begin building a position today -- and seek to add to it if Nvidia's stock price pulls back further in the weeks and months ahead.
