When investors look back on 2022, the prevailing attitude will likely be, "Good riddance!" Over the past year, each of the major U.S. stock market indexes suffered at the claws of the bear market. The worst performer by a country mile was the Nasdaq Composite, which is still down 29% from its peak in late 2021.
Seasoned investors will note that corrections and bear markets are all part of the price of admission when investing. Keeping your head while others lose theirs is simple, but it isn't for the faint of heart. The good news is this: For investors with the resources and fortitude to weather the storm, market plunges offer the best opportunity to buy quality companies at a discount. History also shows that every previous sell-off has paved the way for an upcoming bull market.
One bear market bargain that's staring investors right in the face is semiconductor pioneer Nvidia (NVDA +1.73%). Looking at the big picture, it should become clear that investors should be buying this stock before it starts to soar.
Image source: Getty Images.
The elephant in the room
Given the events of the past year, it's understandable that fair-weather investors have run for cover. In its fiscal 2023 third quarter (ended Oct. 30, 2022), Nvidia's revenue declined 17% year over year to $5.9 billion. Even more concerning was the profit picture, as earnings per share (EPS) crashed 72% to $0.27.
Leading the decline was evaporating demand for Nvidia's graphics procession units (GPUs), which are the top choice among gamers. Gaming revenue tumbled 51% year over year as the combination of soaring inflation and rising interest rates weighed on discretionary spending. The rising cost of gas and groceries has taken precedence, putting the upgrade to the latest gaming chip on the back burner.
If the macroeconomic cloud had a silver lining, however, it was Nvidia's data center segment. Revenue rose 31% year over year, driven by robust demand from data centers and cloud computing operations.
Some investors, fearing the worst, headed for the exits, sending Nvidia stock plunging more than 42% from its late-2021 high.
However, staring too closely at the recent results tends to blur the big picture.
An important history lesson
While past performance is no guarantee of future results, it can be informative. As recently as its 2023 fiscal first quarter (which ended May 1, 2022) Nvidia was putting up new milestones. The company reported record quarterly revenue that grew 46% year over year to $8.29 billion, while adjusted EPS grew 49% to $1.36.
The robust results came on the heels of the company's record fourth quarter and record fiscal 2022, as sales grew 61% to $26.9 billion, resulting in record EPS that grew 123% to $3.85 -- so the results were no anomaly.
Nvidia remains the undisputed leader in the discrete desktop GPU market, with a dominant 88% share in the third quarter, leaving crumbs for its rivals. This shows that Nvidia processors remain the industry standard.
When taken as a whole, the data clearly illustrates that Nvidia is being buffeted by the prevailing macroeconomic headwinds -- not from any failure involving the business. When the rebound begins, which it inevitably will, Nvidia's growth will return to its former glory, led by pent-up demand for its high-end gaming processors.
NASDAQ: NVDA
Key Data Points
Important data
Even in the face of the economic downturn, the secular tailwind driving the adoption of cloud computing continues. Nvidia is the partner of choice for all the major cloud providers. Alphabet's Google Cloud, Amazon Web Services, and Microsoft Azure all rely on Nvidia's processors and accelerators, as does Alibaba Cloud, Baidu Cloud, and Tencent Cloud.
The need to speed data through the ether will only increase from here. Data centers experienced record adoption in 2021, spurring unprecedented growth last year. The need is so great, in fact, that half of the data centers being built are fully leased before construction is even completed. Furthermore, demand for data center capacity more than tripled year over year during the first half of 2022, led by many of the hyperscale operators listed above.
This suggests the table is set for a stunning recovery for Nvidia once the economy recovers.
Let's talk about price
There's an old saying, "You get what you pay for," and Nvidia has never been cheap in terms of traditional valuation metrics.
The stock is currently selling for 17 times sales when most experts agree a reasonable price-to-sales ratio is between 1 and 2. That's not to say that Nvidia stock couldn't fall further from here, but calling the bottom is virtually impossible.
Furthermore, given the company's history of above-average growth and robust future prospects, Nvidia stock is worth every penny.
