Nvidia (NASDAQ:NVDA) is in a bear market, with NVDA stock down nearly 33% from its all-time high. Meanwhile, the Nasdaq is in correction territory, down 15% since topping out on Nov. 22. I’m sure some investors are wondering if Nvidia’s trading action is a sign that tech stocks are about to enter an extended bear market.
It’s too early to tell. But as for what it means for NVDA stock itself, the answer is, probably not much.
The latest Moody’s report suggests gross domestic product (GDP) in the U.S. will increase by 4.4% in 2022. That’s 100 basis points less than a year ago, but still a solid amount of growth.
Unless the economy goes completely off the rails, Nvidia is perfectly positioned to benefit from secular trends that continue to accelerate worldwide.
Buy NVDA Stock on the Dip
NVDA stock is down 20.5% for the year. The VanEck Vectors Semiconductor ETF (NASDAQ:SMH) — of which Nvidia is the second-largest position with a 9.5% weighting — is down 12% year to date. And the Invesco QQQ Trust (NASDAQ:QQQ), which is a decent proxy for tech stocks, is 11.6% in the hole.
NVDA stock is approaching the $230 level. The last time it was below it was in late October. So it hasn’t been all that long since it last traded at current levels. If shares were trading at $150, that would be a different story. In other words, they have a long way to fall before the alarm bells go off.
InvestorPlace’s Chris MacDonald recently discussed the beatdown major tech stocks received. MacDonald suggested rising interest rates have investors shuffling their portfolios, worried that higher rates will translate into slower economic growth, which hits tech stocks squarely in the face as money moves to safer havens.
However, he also pointed out that many of these largest tech stocks are still near all-time highs. Nvidia is not in that boat. Since NVDA stock hit its all-time high of $346.47 on Nov. 22, shares have lost a third of their value.
In many respects, though, this two-month correction is the best thing that could have happened to NVDA stock. The wall of worry from a premium valuation has been relieved to some extent, allowing the shares to prepare for their next leg up.
Could Shares Hit $400 in 2022?
Nvidia reported results for its fiscal third quarter on Nov. 17. The company saw record revenue from its gaming segment of $3.22 billion, 5% higher than the previous quarter and 42% higher than a year ago. Revenue from data centers, its second-largest market platform by revenue, hit $2.94 billion, up 24% sequentially and 55% year over year. Those two platforms accounted for 87% of the $7.1 billion in overall revenue in the third quarter.
Chief Executive Officer Jensen Huang, who I consider to be one of America’s best CEOs, summed up the future as follows:
Omniverse was a major theme at [GPU Technology Conference]. We showed what is possible when we can jump into virtual worlds. Omniverse will be used from collaborative design, customer service avatars and video conferencing, to digital twins of factories, processing plants, even entire cities. Omniverse brings together NVIDIA’s expertise in AI, simulation, graphics and computing infrastructure. This is the tip of the iceberg of what’s to come.
When you consider that Nvidia’s free cash flow (FCF) for the nine months ended Oct. 31 was $5.3 billion, 83% higher than a year earlier, the sky’s the limit for the stock’s valuation. Assuming full-year FCF of $7.1 billion [$5.3 billion divided by three and then multiplied by four] and $26.7 billion in revenue, Nvidia has a FCF margin of 27.2%.
This compares to 34.3% for Microsoft (NASDAQ:MSFT), a company with a $2.27 trillion market cap. Microsoft’s FCF yield is 2.7%. Nvidia’s is 1.2%. However, Nvidia’s growing its revenues and FCF at a slightly faster pace.
Assuming business remains brisk in 2022, a combination of multiple expansion and higher numbers should help justify a share price in the $400 ballpark for NVDA stock. That’s more than 70% above the current price. But everything has to unfold like clockwork.
The Bottom Line on NVDA Stock
Stocks aren’t expected to do as well in 2022 as last year. That’s going to act as a headwind. Rising interest rates will also play a role in holding back share prices. Lastly, the S&P 500 has doubled over the past five years. At some point, it has to take a breather.
That said, Nvidia remains one of the best-run companies in America. So if anything can deliver in 2022, NVDA stock has got to be it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.