The broader market indexes have already seen meaningful declines in 2022. The pandemic led to supply chain shortages and widespread inflation. As a result, central banks have begun raising interest rates to slow economic activity and tame inflation. Typically, rising interest rates lead to stock price declines, and this time has been no different.
If you’re a long-term investor, that has presented some opportunities to scoop up excellent stocks at lower prices. Nvidia (NVDA -2.08%) has seen its share price fall 59% off its high. After soaring during the earlier stages of the pandemic, Nvidia’s sales growth is slowing. Let’s see why Nvidia could be an outstanding stock to buy if the broader-market declines take its share prices down even more.
Nvidia has shown impressive earnings growth
Looking at Nvidia’s longer term, its revenue has exploded from $4.3 billion in 2013 to $27 billion in its most recently completed fiscal year. The bulk of that growth came in its two most recent years when it experienced sales expansions of 53% and 61%. Nvidia sells graphic processing units (GPUs) used in data centers, gaming devices, and cars. While data center demand for Nvidia’s chips remains robust, changing consumer behaviors have suddenly decreased demand for its chips in gaming devices.
That was to be expected. Gaming was a popular pastime when folks were cooped up at home with limited entertainment options. Now that economies have reopened, folks are spending more money on away-from-home experiences like concerts, ballgames, and restaurants. In its most recent quarter, which ended on July 31, gaming revenue fell 33% from the same quarter the year before to $2 billion.
Further, Nvidia’s GPUs are commonly used in mining cryptocurrency, a process that renders digital currency to individuals for allowing their computers to solve complex calculations. Prices for most cryptocurrencies have fallen significantly since the same quarter last year, decreasing demand for Nvidia’s chips to mine digital assets. Management has acknowledged this relationship between the prices of cryptocurrencies and demand for its GPUs, noting it is unable to quantify the extent.
More impressive than Nvidia’s revenue growth in the last decade has been its profit expansion. The company has increased its earnings per share at a compound annual rate of 32.3% in the previous 10 years. Specializing in manufacturing and selling difficult-to-produce technology has allowed Nvidia to increase its gross profit margin meaningfully, surpassing 60% in four consecutive years.
Nvidia might have trouble in the short term
Admittedly, the near term will be volatile for Nvidia. The sudden decrease in demand from gamers has caused a buildup of inventory that it might need to discount to sell. Management is forecasting revenue of $5.9 billion in the third quarter, which would be a significant decrease from the $7.1 billion it earned in the October quarter last year.
That said, Nvidia is riding several longer-lasting secular tailwinds that could expand the need for its GPUs — including artificial intelligence, the transition to driverless cars, and the rise of virtual reality gaming. Nvidia’s stock is already down 59% off its high. If a broader market sell-off takes its stock down another 10% or more, it could be an excellent stock to buy and hold long term.