Down 30% from its peak, is Nvidia a buy?
Shares of the high-performance chip specialist Nvidia (NASDAQ: NVDA) are currently down about 30% from the all-time high of $346.47 they hit in November.
Much of this decline can be attributed to traders shifting their funds from growth stocks to value stocks in response to the Federal Reserve’s plans to raise interest rates and shrink its balance sheet in 2022. A stronger-than-expected January jobs report and soaring inflation can be expected to bolster the Fed’s resolve to continue tightening monetary policy — and that’s not a sign positive for capital-hungry growth companies.
Additionally, at its high valuation, Nvidia is also exposed to significant title risk. Its share price fell briefly on Tuesday after it announced that it was abandoning its plan to acquire mobile chip designer Arm.
The U.S. Department of Commerce recently highlighted the fragility of the global semiconductor supply chain in 2022. However, the agency also expressed the possibility of new manufacturing capacity coming online as early as the second half of 2022, which might help reduce the chip somewhat. shortages. With Intel, Semiconductor manufacturing in Taiwanand with Samsung already planning huge investments in capacity expansion, we may see increased pricing pressures in the semiconductor industry over the next few years.
While none of these challenges should be taken lightly, there are still plenty of tailwinds that can make Nvidia a winning pick in 2022. Let’s look at a few important ones.
Gaming and data center segments remain unmatched
Since fiscal 2019, ended January 31, 2020, Nvidia’s revenue and free cash flow have more than doubled, while gross margin and operating margin have increased by 490 basis points and 920 basis points, respectively. . This tremendous growth is mainly due to the growing demand for the company’s graphics cards and artificial intelligence (AI) processors in the gaming and data center segments.
Nvidia currently accounts for almost 80% of the gaming GPU market. The company’s GeForce RTX-powered laptops are increasingly being used not only in gaming, but also in areas such as esports, creating digital content and streaming. Nvidia estimates that only a quarter of its installed base has adopted RTX GPUs. Plenty of opportunity remains as existing GeForce gaming users continue to transition from older GTX cards to RTX laptops. Thanks to these tailwinds, Nvidia saw its gaming revenue jump 72% year-over-year to $9 billion in the first nine months of fiscal 2021, ending January 31, 2022.
Nvidia also accounted for nearly 80.6% of the global cloud and data center AI processor market in 2020. edge computing and analytics, Nvidia is well positioned to target the The data center market is estimated to reach $100 billion by 2024. In the first nine months of fiscal 2021, data center revenues company data soared 53% year-over-year to $7.4 billion. Increased revenue exposure to the data center segment is also helping to improve the company’s gross margin profile.
The automobile and the opportunities of the metaverse
The automotive sector is increasingly seen as the next big growth catalyst for Nvidia. The company offers a complete platform solution, which includes the hardware, software and infrastructure (servers, computing power and data centers) needed to support autonomous vehicles. The company estimates its design pipeline for autonomous driving and the artificial intelligence cockpit platform at more than $8 billion. With Nvidia’s automotive business generating just $441 million in revenue in the first nine months of fiscal 2021, there’s still a long way to go for the company in the coming quarters.
Nvidia is also well positioned to capture much of the evolving metaverse opportunity, estimated at $1 trillion to $30 trillion depending on the source. The company’s high-speed GPU chips, data center processor and next-generation Bluefield data processing unit will play a major role as the hardware technology needed to support the metaverse. Nvidia also introduced a real-time scalable software platform called Omniverse. It allows designers working on various software platforms to collaborate virtually and develop 3D simulations of objects in real time.
The recent pullback is an entry opportunity
Analysts expect Nvidia’s revenue for fiscal year 2022, ending Jan. 31, 2023, to be $31.54 billion, while earnings per share under generally accepted accounting principles (GAAP) is expected. be $5.18.
Based on these forecasts, Nvidia is trading at 19.5 times fiscal 2022 revenue and 47.4 times fiscal 2022 earnings. While not very low, these valuation multiples fell sharply from their November 2021 highs.
Therefore, against the backdrop of several secular tailwinds, a solid operating and financial model, and a reduced valuation, Nvidia may be a solid choice in 2022.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.