NVIDIA Corporation Stock Crashed After Rising 26% This Year: A Buying Opportunity?

Shares of graphics-chip company NVIDIA (NVDA 3.45%) have been on a bit of a roller-coaster ride so far this year. After rising 26% from the beginning of 2014 through the end of August, the stock switched direction, falling in recent weeks. Let's take a closer look at the drivers behind NVIDIA's in 2014 and see if shares are a buy.

NVDA data by YCharts

Strong growth in all segments
NVIDIA's main business is designing graphics processing units, or GPUs, for PCs, providing users with the ability to play the latest graphics-intensive PC games. The GPU business has been strong for NVIDIA all year, thanks to both strong demand for its gaming GPUs and growth in its enterprise business. Here's a look at the recent performance of NVIDIA's GPU business:

Source: NVIDIA.

Since this growth came despite the weak PC market that has persisted over the past few years, it seems that the gaming PC market, and therefore the bulk of NVIDIA's business, is far more resilient than the PC market as a whole.

NVIDIA's other segment, the Tegra mobile processor, has also had a hand in driving NVIDIA's stock price higher this year. The Tegra segment remains unprofitable, but revenue has been growing rapidly so far in 2014, and the losses are starting to decrease. Tegra revenue grew by 35% year over year during the first quarter and by a staggering 202% year over year during the second quarter.

After shifting its focus away from mainstream mobile devices and toward more specialized applications for its Tegra processors, NVIDIA's mobile strategy now has the potential to significantly increase earnings going forward. The automotive market is one area NVIDIA is targeting, and already 19 global automotive brands -- most recently including Honda -- have partnered with the company to use its Tegra processors to power in-car infotainment systems. Tegra's potential to eventually become profitable, in part because of the automotive market, was almost certainly a major factor in the stock's positive performance during the first half of the year.

Why is the stock falling?
Over the past month or so, NVIDIA shares have plummeted, down nearly 17% since the beginning of September. Nothing has changed about the company during this time; in fact, NVIDIA launched two new graphics cards to stellar reviews, and they should be extremely successful as they undercut the prices of rival AMD. NVIDIA's recent decline seems to be strictly the result of the decline of the stock market as a whole.

This decline represents an opportunity for investors to buy the stock at a very good price. On the surface, NVIDIA appears expensive, with a trailing-12-month P/E ratio of about 18. But the company's cash-rich balance sheet makes the stock look more expensive than it really is. NVIDIA has roughly $3.3 billion in net cash on its balance sheet, which represents a little more than a third of the company's total market capitalization. Back out this cash, and the TTM P/E ratio falls to just 12, a far more attractive valuation.

Future growth can be driven by the continued strength of the GPU business -- both the PC gaming portion and the enterprise portion -- as well as by eventually bringing the Tegra segment to profitability. During the past six months, the Tegra segment has recorded an operating loss of $116 million; if Tegra had broken even instead, the total operating profit would have been more than a third higher during that time. If NVIDIA can bring Tegra to profitability over the next few years, a big boost in earnings would be the result.

Final thoughts
The rise in NVIDIA's stock price through August of this year was driven by strong growth of the company's processors in both gaming and automotive markets, and the recent collapse has created an opportunity to buy the stock at a great price. Nothing has changed about the company in the past month to warrant the decline, and NVIDIA's current valuation is well below what the stock deserves, given the company's growth prospects.