Nvidia (NASDAQ:NVDA) has been getting hammered lately. As of this writing, NVDA stock is down 12% over the past five days. The news may be worse by the time you read this article.
The catalyst is obvious. Equity markets worldwide are selling off amid rising fears surrounding the coronavirus from China. Semiconductor stocks like Nvidia have been hit particularly hard.
Advanced Micro Devices (NASDAQ:AMD) has dropped 18%. Even Intel (NASDAQ:INTC), hardly anyone’s idea of a high-flying growth stock, is down over 9%.
It’s certainly possible the selloff will continue. The Nasdaq Composite still is up 623% from its 2009 low. Valuations across the market have looked stretched, particularly in tech.
But long-term investors know that selloffs provide buying opportunities. Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) chairman Warren Buffett said as much just this week. In a panic, even quality names go on sale.
Nvidia no doubt is a quality name. And while NVDA stock isn’t cheap, this selloff looks like an opportunity.
Don’t Take This Selloff Lightly
To be clear, I’m not recommending investors go flying into the stock just yet. The fears in the market are real, as evidenced by the quick and steep reversal of gains in early trading on Tuesday.
There’s going to be a “flight to safety.” And as highly as I think of Nvidia as a company, and a stock, semiconductor stocks are pretty much never considered “safe.”
Broad market trading aside, the spread of the new virus from China can and likely will impact Nvidia’s near-term results. One-quarter of the company’s fiscal 2020 sales came from China and Hong Kong, according to Nvidia’s Form 10-K filed with the U.S. Securities and Exchange Commission. Another 52% were generated in Taiwan and the rest of the Asia Pacific region.
Those figures overstate the case somewhat. Nvidia allocates its revenue to the country in “which the products are initially billed.” The end customers for many of those sales are elsewhere in the world.
Still, the vast majority of Nvidia sales at least go through Asia, even if only via distributors. And with the likes of Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) closing stores and/or shutting down production lines in the region, there’s going to be an impact for Nvidia as well.
Indeed, the company reduced its fiscal first-quarter guidance earlier this month by about $100 million thanks to coronavirus effects. That guidance may well be cut again. Chief financial officer Colette Kress said on the fourth-quarter earnings call that China alone drives about 30% of gaming revenue — or over $1.6 billion in fiscal 2020 sales.
Add to that pressure on data center revenue, as companies worldwide pull back on spending. There’s some basis for the short-term fears pressuring the stock at the moment.
Don’t Ignore the Case for NVDA Stock, Either
That said, as always, investors should focus on the long-term case. And there are few stocks in the market with a better long-term case than Nvidia.
One of the best ways to make money in this market has been to own the leader in an industry with a long-term, secular tailwind. Nvidia is the leader in GPUs (graphics processing units). And it has not one, but multiple, long-term tailwinds.
Gaming still drives about half of Nvidia’s revenue — and that market will grow over time. More people play video games. They play them for longer, into their 30’s and even beyond. As games get better, more processing power is required, which means better and higher-priced Nvidia chips. Ray tracing provides another catalyst. AMD is trying to make inroads with its Radeon line, but Nvidia remains the unquestioned king.
Data center revenue will build, as more data moves into the cloud. That market slowed last year, but as Nvidia promised, it has recovered nicely. Revenue in the category increased 43% year over year in the fourth quarter. That came after Intel stunned Wall Street with just a 19% increase. Clearly, Nvidia is chipping away at Intel’s dominance there.
In automotive, Nvidia is well-positioned for autonomous vehicles. That market isn’t providing much in the way of revenue yet — less than 7% of fiscal 2020 sales — but it should generate explosive growth in the future. Artificial intelligence is yet another trend that will push Nvidia sales higher.
There are years of growth ahead for Nvidia. No, the growth won’t be perfectly linear. The new virus from China will have an impact in 2020. The bursting of the “crypto bubble” in late 2018 caused a speed bump.
But, again, focus on the long-term. Revenue has grown, and will continue to grow. Nvidia stock has been one of the market’s plays best for years now, and should be so again going forward.
A Buying Opportunity
To some investors, Nvidia stock might look expensive even after the declines. The stock still trades at 45x fiscal 2020 adjusted EPS. That’s a big multiple.
But remember that fiscal 2020 was not a normal year for Nvidia. The crypto hangover bled into results in the first half of the year. So did the pause in data center spending. By the end of the year, Nvidia was back on track. So was NVDA stock.
I’d expect a repeat of that pattern at some point. Short-term worries have hit Nvidia before. Every time, those worries drove a selloff that proved to be a buying opportunity. The coronavirus will be contained, investors will move on, and the stock will bounce back. The only real question is how far the stock will drop before that happens.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
