Is This Former High Flyer a Screaming Buy?

Nvidia, a leading manufacturer of graphics processing units (GPUs), had a record-breaking year in 2022 with annual revenue reaching north of $26 billion, an increase of over 60%.

Earnings also improved by over 120%, totaling $3.85 per share. One of the major contributors to this success was the Data Center segment, which accounted for 40% of the company’s overall sales in the fiscal year and has seen a CAGR of 66% over the past 5 years.

This can be attributed to the increasing use of artificial intelligence in data centers and the growth of the microchip technology industry. While Nvidia has had a successful year, it remains to be seen if the company will be able to maintain this momentum in the face of potential challenges in the coming quarters.

Will A Crypto Rebound Spark Future Growth?

As interest in cryptocurrency has grown, the demand for graphics cards, which are a crucial piece of hardware for mining digital assets, has also increased.

These graphics processing units (GPUs) are used to mine popular cryptocurrencies like Bitcoin are well-suited for the task because of their ability to perform multiple calculations at once.

The performance of Nvidia’s gaming division, which produces GPUs, is closely tied to the state of the cryptocurrency market. When the value of cryptocurrencies is on the rise, there is a higher demand for GPUs and Nvidia’s sales increase.

However, when the crypto market is struggling, there is less demand for GPUs and Nvidia’s revenue decreases. The volatility of the cryptocurrency market has had a negative impact on Nvidia’s gaming revenue, which saw a 51% drop in the third quarter with sales of only $1.57 billion.

While Nvidia is showing promise in other areas such as its automotive venture, this part of the company only made up 2% of total sales last year.

Are Economic Headwinds Temporary?

As the pandemic began in 2020, many businesses, particularly car manufacturers, anticipated a significant drop in sales and subsequently reduced their orders for microchips. However, the sudden shift to remote work also led to a rapid increase in the demand for digital products that rely on semiconductors to function.

This increased the sales of home IT equipment as people looked for ways to adapt to the new normal. As car companies reduced production, the demand for these other types of products grew even more. This strain on the chip supply chain was exacerbated when automotive production ramped up again, and many components needed for microcontroller fabrication had already been used for smartphones and other devices, leading to a shortage for the vehicle industry.

Semiconductor companies are now investing billions of dollars in building new fabrication plants to increase production and address these issues, but these facilities are not expected to be fully operational until 2023 or later.

Fabless semiconductor companies like Nvidia, who outsource the manufacturing of their chips to other enterprises called foundries, are also impacted by these supply chain issues and it may take years for these problems to be resolved.

The Future For Nvidia

Highly valued companies often have the ability to improve their business fundamentals at a rapid pace. However, this does not necessarily mean that all stocks with steep premiums will perform as expected. This appears to be the case with Nvidia at present, as its shares are valued at over 40x its forward earnings.

This does not necessarily mean that Nvidia is a poor business, but it does suggest that potential shareholders should wait for the stock price to decrease and the company to trade at a more reasonable financial multiple before making an investment.

Bottom line, is Nvidia stock a screaming buy? Not yet.