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Nvidia Stock Is in a Bear Market. Why It’s Time to Buy the Highflying Chip Maker.

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Nvidia stock has gotten hit hard. One investor explains why it may be time to buy.
David Paul Morris/Bloomberg

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Nvidia (NVDA) stock, like many tech shares, has tumbled from its 2021 high. But with the “metaverse” providing a tailwind, it may be time to buy.

Shares of Nvidia have tumbled more than 25% from its late November all-time of $333.76, a drop technically defined as a bear market. There’s nothing fundamentally wrong with Nvidia. Its failed acquisition of chip designer ARM has been an overhang, and It has gotten hit, along with other high-growth stocks, because Federal Reserve is getting ready to raise interest rates, something that ultimately makes the future profits of growth firms like Nvidia worth less.

Now, buying the dip makes a lot of sense.

Yes, Nvidia should make a lot of money in the future. It’s supplying the technology for the Metaverse, something that represents a brand new sales opportunity. The company is encoding new software into its graphics, data center, and automotive chips, software that it is monetizing by raising the price of the chips, like those that go into new Metaverse products. Nvidia is “one of the best plays on the Metaverse,” said Rhys Williams, chief investment officer at Spouting Rock Asset Management, which owns the stock. “They’re hitting on all the touchpoints on where the world’s going.”

That will help drive higher sales and earnings growth for years to come. Analysts expect the company’s sales and earnings per share to compound at annual rates of 20% and 25%, respectively, for the next five years. That put sales at $56.2 billion and earnings-per-share at $11.02 by 2026, according to FactSet.

Helping drive the EPS growth will be expanding profit margins. The software business carries higher margins and, as that segment ramps up, it should bring Nvidia’s operating margin up to 58% by 2026, from 47% expected for 2021.

Yet the profit forecast still seems too low because the consensus implies a big decline in sales from 2021’s 60% growth to 20% average over five years. That massive drop in the pace of growth seems unlikely, says Williams. “That would be a huge deceleration,” Williams said. “I am expecting them to do better than consensus,” as management usually maps out a conservative sales estimate for analysts, he added.

But even if profits don’t beat expectations, their growth can still bring the stock higher because it’s not trading too expensively. At 44 times 2022 EPS expectations, the PEG ratio–price/earnings ratio divided by expected earnings growth–is just 2 times, below its 5 year average of 3 times.

“[The] stock could appreciate nicely,” Williams said.

Nvidia is scheduled to report earnings on Feb. 16.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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