NVDA with Nobias technology: Has The Taper Tantrum Created A Buying Opportunity For Nvidia?
Nvidia has been one of the top performing stocks in the market during the last 1, 5, and 10-year periods (where it has posted returns of 96.4%, 927.75%, and 7,642.2%, respectively). The company is a semiconductor stock that offers unique leadership and exposure to secular growth stories in the gaming, the artificial intelligence, the data storage, and the metaverse markets. With this in mind, NVDA has been a favorite growth stock for investors for years; however, shares are down more than 22% from their recent 52-week highs.
It’s clear that NVDA has been caught up in the speculative growth stock sell-off that has occurred in recent weeks due largely due to fears of ongoing supply chain issues as well as economic policy from central banks which might lead to lower multiples being placed on risk assets. But, now that this 20%+ sell-off has occurred, the question remains: is this a dip worth buying? Are Nvidia's best days behind it? Or, will investors who accumulate shares into this period of negative volatility be rewarded? To answer these questions we took a look at recent reports published by the credible authors and analysts that the Nobias algorithm tracks.
Harsh Chauhan, a Nobias 5-star rated analyst, touched upon NVDA’s recent weakness in a late-December article where he highlighted the stock’s strong 2021 returns (overall), the bearish catalysts that the company continues to face, and his outlook for the stock during 2022 and beyond. He began his piece by saying, “One of the reasons for the stock's recent dip is probably the U.S. Federal Trade Commission's (FTC) move to block Nvidia's proposed acquisition of British semiconductor company Arm Holdings. Another reason may be the global chip shortage that is likely to continue well into 2022 and potentially hurt Nvidia's sales, as it may not get enough components to manufacture its graphics cards that are used in several applications ranging from personal computers (PCs) to data centers to cars.”
NVDA Jan 2022
Not only does the stock have ongoing operational headwinds in play, but Chauhan also notes that the stock’s high valuation is likely to put hurdles ahead of ongoing growth. He stated, “The biggest challenge that Nvidia faces going into the new year is justifying its rich valuation, for which it will have to sustain its impressive pace of growth. The chipmaker is trading at nearly 84 times trailing earnings, which is way above its five-year average earnings multiple of 56 and the S&P 500's earnings multiple of 28. What's more, Nvidia is trading at 28 times sales as compared to the S&P 500's multiple of 3.19.”
Since Chauhan’s piece was published, NVDA shares have continued to fall. This means that their valuation multiple is lower today than the figure that Chauhan stated. Today, NVDA shares trade with a blended price-to-earnings ratio of 62.54x and a forward price-to-earnings multiple (based upon the current consensus earnings estimate for 2022 of $5.15/share) of 51.6x.
Now, this still represents a stark premium relative to the S&P 500’s forward earnings multiple in the 21x area. And, therefore, to maintain this type of premium valuation, a company needs to post strong growth. NVDA did this during its most recent quarter. With regard to recent growth, Chauhan noted, “Nvidia recorded 50% year-over-year revenue growth in the third quarter of fiscal 2022 thanks to the gaming and data center businesses along with a 60% spike in earnings per share.” However, looking ahead to the coming quarters, Chauhan notes that weakness in the PC space could continue to serve as a potential headwind for the stock in the coming quarters. He wrote, “For instance, PC sales are expected to take a hit next year.
The downtrend is expected to begin in the current quarter itself, according to IDC. The research firm expects a 3.4% drop in PC shipments this quarter thanks to supply chain constraints and high logistics costs.” He continued, “IDC sees the PC market declining close to 5% in 2022, which is likely playing on Nvidia investors' minds, as 45% of Nvidia's revenue in the third quarter of fiscal 2022 came from selling the graphics cards used in gaming PCs.” However, it might not be as simple as PC weakness hurting shares, because, as Chauhan notes, the high-end gaming PC market, which NVDA dominates with its GPU chips, is expected to remain strong throughout 2022. He said, “The overall computer graphics market is expected to grow by $7 billion next year and hit $138 billion in value, according to a third-party estimate. Gaming PCs are expected to hit $37 billion in revenue in 2022, and Nvidia is in a solid position to corner most of this market given its 80%-plus share.”
Furthermore, the GPU’s that Nvidia produces are useful in the data center space as well. Chauhan wrote, “The data center business, which produced 41% of Nvidia's Q3 revenue and clocked 55% year-over-year growth, can get even better in the new year thanks to the deployment of new hyperscale data centers.” He continued, “According to a third-party report, the hyperscale data center market could achieve an annual growth rate of 20% through 2027, creating the need for more data center accelerators that Nvidia sells. As it turns out, the demand for GPUs used as data center accelerators is increasing at an annual pace of 42% and could hit an estimated size of $20.6 billion by 2027.”
Therefore, it appears that fears surrounding short-term supply chain issues and weakness in the overall PC space might have sparked an irrational sell-off of NVDA shares. While it’s true that there could be a sales/earning slowdown in the short-term, Chauhan remains very bullish on the stock’s growth potential over the medium-to-long term. He concluded, “All this indicates why investors shouldn't be concerned about the short-term price fluctuations in Nvidia. It can continue to remain a top growth stock in 2022 and beyond, especially considering that its earnings are expected to reach an annual growth rate of over 39% for the next five years.” Chauhan believes that NVDA remains a stock that long-term investors should buy and hold and he isn’t the only Nobias 5-star rated analyst who has recently posted a bullish opinion on shares.
Nicholas Rossolillo, another 5-star rated author, recently said that Nvidia was one of his top performing stocks in 2021 and while he expects volatility to continue in the short-term, NVDA shares remain one of his favorite long-term investments. Regarding NVDA’s operations, Rossolillo said, “The company's pioneering work in artificial intelligence (AI) -- everything from advanced data center hardware to self-driving car training to healthcare and robotics applications -- could keep Nvidia's growth going strong for many years to come. For years, Nvidia has been talking about this coming wave of innovation, and has been steadily piling billions of dollars into research and development every year (at one of the highest rates among tech giants as a percentage of revenue).” He also touched upon the ongoing bull/bear tug-of-war between NVDA and regulators regarding its proposed ARM Holdings purchase, which, he notes, may not be allowed to come to fruition because of anti-trust concerns.
The $40 billion ARM Holdings deal appears to be a key cog in NVDA’s long-term growth aspirations; however, as Rossolillo notes, it’s not necessary for NVDA to continue to succeed. He said, “No worries, though [regarding the deal possibly being shut down by regulators] -- Nvidia is itself now a top silicon designer, it's gradually expanding its reach into new areas of the semiconductor world, and it's building an incredible software division atop its best-in-class hardware. It doesn't need ARM to continue its march higher.” Rossolillo touched upon NVDA’s speculative valuation and said that he expects there to be “serious volatility” in the short-term; yet, he concludes, “Nvidia is redefining the semiconductor industry, and I believe it will be one of the best stocks to own throughout the 2020s. I'm happy to be along for the ride.”
Manali Bhade, a Nobias 5-star rated author, also recently noted that NVDA shares have the potential to be a big winner over the coming decade. Bhade wrote, “The company's high-end GPUs are already in huge demand in the gaming industry, mainly for their ability to render ultra-realistic graphics. Besides GPUs, the company also has a data center-focused Grace central processing unit (CPU) and Bluefield data processing unit (DPU) in its hardware portfolio. These next-generation hardware technologies stand to play a meaningful role in the evolution of the metaverse.”
And, it’s not just about hardware dominance to Bhade; NVDA’s growing software capabilities also plays a role in her bullish outlook. She continued, “Nvidia is also offering a scalable software platform called Omniverse for creators and engineers to virtually collaborate and create physically accurate 3D simulations of real-time objects, which will be a powerful tool for developing the metaverse. The platform already has immediate applications in areas such as enabling virtual collaboration among 3D designers working on different software platforms, and remote working. Nvidia also sees significant use cases for the Omniverse in creating digital twins (digital simulations) for urban planning, warehouse optimization, and the automotive industry.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Bhade also likes the company’s recent profitability metrics, as well as its balance sheet. She said, “The company's trailing-twelve-month (TTM) revenues were up 64.3% year-over-year to $24.3 billion, while TTM net income has soared by 114.5% year-over-year to $8.2 billion. The company has a strong balance sheet with $19.3 billion cash and $11.8 billion debt.” All in all, Bhade echoed the bullish sentiment that we’ve seen throughout most recent reports…
In short, the credible authors and analysts that we track alike seem to largely agree upon the fact that NVDA shares are expensive in the short-term; however, the stock’s long-term growth prospects have the potential to more than justify current premiums over time.
With that being said, looking at the recent reports published by credible authors that the Nobias algorithm tracks, we see that 88% of recent reports have expressed a “Bullish” opinion. And, when looking at the credible Wall Street analysts (4 and 5-star rated) that our algorithm tracks, we see that the average price target being applied to NVDA shares right now is $344.75. NVDA shares currently trade for $265.75, meaning that this average price target represents upside potential of approximately 29.7%.
Disclosure: Nicholas Ward is long NVDA.
Disclosure: Nicholas Ward is long NVDA. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.