Investors in the artificial intelligence (AI) and chip darling Nvidia (NASDAQ:NVDA) stock saw mouth-watering returns in 2021.
Over the past 12 months, NVDA stock has returned around 82%. By comparison, the PHLX Semiconductor Sector Index returned a little more than 18%.
In November 2021, Nvidia shares hit a record high of $346.47. Yet, since then, it has come under pressure, and currently hovers around $250—down about 14% year-to-date (YTD).
The stock’s 52-week range has been $115.67 – $346.47, while the market capitalization (cap) stands at $627 billion.
Wall Street pays close attention to shares of the chip giant as Nvidia has also moved into disruptive technologies, such as robotics, AI, autonomous driving and the metaverse.
Despite the recent slide in price, buy-and-hold investors with two- to three-year horizons could consider investing in NVDA stock now. Here’s why.
How NVDA Stock’s Q3 Earnings Came
Management announced Q3 results in Nov 17. Revenue was $7.10 billion—a record number, and was up 50% year-over-year (YoY). The company reports revenue in three main segments:
- Data Center (record revenue of $2.94 billion, an increase of 55% YOY);
- Gaming (record revenue of $3.22 billion, an increase of 42% YOY);
- Professional Visualization (record revenue of $577 million, an increase of 144%).
Adjusted earnings per share (EPS) came in at $1.17, up 60% YOY. Free cash flow (FCF) for the quarter was over $1.27 billion.
Wall Street was pleased to see that Nvidia’s efforts to gain market share with data centers was going well. Enterprises, as well as cloud providers, are increasingly relying on its graphics processors.
Following the announcement, CEO Jensen Huang expressed his content with the metrics and highlighted the ways companies rely on Nvidia’s products.
Management also gave a robust forecast for revenue for the current quarter that will end this month. Sales should reach $7.4 billion in Q4.
Before the release of the quarterly results, NVDA stock was shy of $300. Following the announcement, shares saw an all-time high (ATH) of $346.47. But now, they are around $267.50, down around 20%.
Adding Nvidia Stock To Portfolios
Among 43 analysts polled, NVDA stock has a “buy” rating. Also, the consensus of 38 analysts for the 12-month median price target stands at $350, implying an upside potential of over 33% from current levels.
The 12-month price estimates currently range between $200 and $400.
Nvidia shares trade at 58.82 times forward price-to-earnings (P/E) and 31.51x times trailing sales. These valuation metrics imply that despite the recent steep decline in price, NVDA stock is not necessarily cheap.
By comparison, these numbers for Advanced Micro Devices (NASDAQ:AMD) are 42.19x and 11.42x. The comparable metrics for Taiwan Semiconductor Manufacturing (NYSE:TSM) stand at 25.38x and 11.31x. Finally, Intel’s (NASDAQ:INTC), numbers are 13.97x and 2.64x.
Long-term investors who are not concerned about short-term volatility in NVDA stock could consider investing around $250, or even below. Their price target should be analysts’ estimate of $350.
Others who are interested in Nvidia stock but want to diversify their portfolios could instead buy an exchange-traded fund (ETF) that also holds NVDA.
Examples would include the Invesco PHLX Semiconductor ETF (NASDAQ:SOXQ), the Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ), the Roundhill Ball Metaverse ETF (NYSEARCA:META), or the Volt RoboCar Disruption and Tech ETF (NYSEARCA:VCAR).
An Options Trade on NVDA Stock
Finally, those readers who are experienced in options could also consider putting together an options trade, such as a bull call spread. This strategy may be appropriate if you are bullish on NVDA stock at this time.
However, readers should note that options trading is not suitable for most retail portfolios, and thus the discussion below should mostly be taken as an educational piece.
In a bull call spread, the trader typically buys a call and then sells an out-of-the-money (OTM) call. The trade profits when the underlying stock rises in price.
Both of these calls have the same expiration date. And the options trader establishes the spread for a net debit (or net cost). At trade entry, the investor always knows the maximum profit and loss potential.
As I write, NVDA stock is hovering at $250.80. For example, the trader could buy the Mar. 18 260 call and sell the 270 call. The trade cost (or maximum loss) would be $380 (difference in the option premiums multiplied by 100).
Similarly, the maximum potential profit would be $620 (difference in strike prices, multiplied by 100 less the premium paid). Understandably, these numbers do not account for brokerage costs or potential taxes.
On Mar. 18, if NVDA stock closes below 260, the most this trade would lose is the $380 premium paid. And, at expiry, the trade would breakeven (i.e., neither gain nor lose money) at a stock price of $263.80.
Finally, the potential gain will also be capped above $270. Put another way, it does not matter how high Nvidia shares could go up as the trade’s maximum profit potential is $620.
The Bottom Line
Nvidia has become one of the most important chip and AI names in the past several years. However, along with many other hot tech shares, NVDA stock is currently under significant pressure.
High-growth names like Nvidia occasionally become vulnerable due to a prior rapid increase in price. After a year like 2021 that saw NVDA shares almost double in price, some short-term profit-taking was to be expected.
We now have a busy earnings season in front of us. Therefore, the current volatility could easily continue for several more weeks. As Wall Street gets ready to hear quarterly metrics from the semiconductor industry, Nvidia shares will likely stay volatile in the near future.
Yet, long-term investors, who can handle such short-term choppiness, could regard further drops in NVDA stock price as a good opportunity to buy into this growth company.
On the date of publication, Tezcan Gecgil is both long and short NVDA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.