Shares in Nvidia (NVDA 4.35%) have risen sharply this year, helped along by better-than-expected fourth-quarter earnings. That said, the semiconductor giant is still down roughly 30% from its all-time high of $333 in late 2021, meaning investors still have a chance to buy the dip. Let's explore two reasons the company is still a buy.
The bad news looks priced-in
Like many tech companies, Nvidia performed poorly in 2022 as pandemic-era consumer trends faded. While the Federal Reserve compounded the problem by raising rates (which can hurt growth stock valuations), Nvidia's company-specific challenges are the core issue.
The company's industry-leading graphics cards are used extensively for gaming hardware and cryptocurrency mining -- two industries that tanked as people returned to in-person entertainment options and pivoted away from volatile asset classes. Nvidia's fourth-quarter earnings highlight the extent of this problem, with revenue down 21% year over year to $6.05 billion amid a 46% collapse in the gaming segment.
That said, Nvidia's long-term thesis remains intact. The graphics processing unit (GPU) industry enjoys massive barriers to entry because of its technical complexity, and Nvidia boasts a market share of 91%. So while gaming is on a downcycle, Nvidia is still in position to benefit when industry conditions improve. Further, its economic moat allows it to pivot to synergistic opportunities in artificial intelligence (AI).
Artificial intelligence could power the next leg of growth
Nvidia's management is hugely optimistic about AI. On an analyst call in January, the company's CEO, Jensen Huang, called OpenAI's ChatGPT an "iPhone moment" for the tech industry. Burgeoning AI adoption could also be a proverbial iPhone moment for Nvidia itself because its industry-leading CPU chips power much of the hardware behind ChatGPT and other similar AI platforms.
Image source: Getty Images.
According to research group Omdia, Nvidia controls 80% market share in the AI processor market. And the ChatGPT platform used 10,000 Nvidia GPUs to train its model. As more companies get involved in the AI arms race, it could lead to soaring demand for Nvidia's products.
Huang says his company is working directly with 10,000 AI start-ups worldwide, so the potential here is massive -- although Nvidia hasn't made concrete revenue predictions yet. AI technology can also support growth in Nvidia's data center business through applications like monitoring server performance and minimizing downtime.
Is it too late to buy Nvidia?
With a price-to-earnings (P/E) multiple of 51, Nvidia stock is not cheap compared to the S&P 500 average of 21. That said, the company's premium looks justified, considering its exceptional economic moat in the GPU market and opportunity to benefit from a potential rebound in gaming, cryptocurrency mining, and other GPU-intensive applications.
More importantly, Nvidia stands to benefit tremendously from the growth and adoption of AI technology, which could revolutionize the entire global economy in the most optimistic scenarios. The shares still look reasonably priced in light of the company's long-term potential.
