Down 15% in the first two weeks of the new year, now looks like a great time to buy shares of semiconductor giant Nvidia (NASDAQ:NVDA). Pulled down with the broader technology sector, NVDA stock is now 27% below its all-time peak of $346.47 reached last November. And the current price of just under $252.61 a share offers an attractive entry point for investors looking for a quality, long-term semiconductor stock.
There doesn’t appear to be anything structurally or financially wrong with Nvidia, and the company has not issued any news that would negatively impact its share price. The decline in Nvidia seems to be the result of the broader selloff in technology stocks, with the Nasdaq index down around 13% since the year’s first trading day on Jan 3. However, the selloff in Nvidia’s stock looks to be overdone and investors might want to take advantage before the share price moves higher again.
Weathering a Global Shortage
Not only has Nvidia not issued any damaging news, the company has managed to outperform its peers and weather the global semiconductor shortage of the past year better than most competing companies.
In fact, Nvidia reported blockbuster third quarter (Q3) results that showed its year-over-year revenue rose 50% to $7 billion, including record revenue of $3.2 billion from the company’s gaming division, which was up 42% on an annualized basis; and record data center revenue of $2.94 billion, which was up 55% year-over-year. It all added up to Nvidia posting Q3 net income of $2.46 billion, which was 84% higher than the third quarter of 2020. Across the board, Nvidia continues to outperform.
And while its data center business, which includes cloud computing, continues to grow strongly, Nvidia continues to be powered by its gaming segment, with its graphic processing units (GPUs) now powering more than 200 million gaming computers globally. Between 2017 and 2021, sales of Nvidia’s gaming business grew at a compounded annual growth rate (CAGR) of 22%.
Moving forward, Nvidia’s business is expected to expand further as its chips are used in a growing number of self-driving cars and buses, as well as by companies that are involved in the creation of the so called “metaverse,” a digital three-dimensional world driven by artificial intelligence technology.
Acquisition and Valuation
If there are two issues weighing on NVDA stock right now, it is the company’s ongoing efforts to complete its acquisition of British chip maker Arm Holdings, which is subject to regulatory approval in jurisdictions the world over, and the current valuation of the stock, which is at its highest level in a decade. Regarding the Arm deal, the two companies recently came out swinging against critics who warn that the acquisition will hurt competition in the semiconductor space. In a submission to the U.K.’s Competition and Markets Authority, Nvidia and Arm accused critics of exaggerating Arm’s past success, ignoring its current financial position, and overstating Arm’s market power.
The defensive move comes as regulators from Britain to China express concerns about Nvidia acquiring Arm. Nvidia says it still hopes to wrap up the $40 billion deal by 2023. However, even if the deal is scuttled by regulators, analysts say Nvidia has plenty of upside and room to grow with its existing operations and dominant market position in graphics processing units that are deployed in video game consoles and personal computers. Nvidia’s technology is widely viewed as being best in class and ahead of its competitors, and it is used to power everything from today’s super computers to artificial intelligence applications.
Regarding valuation, NVDA stock is looking a little on the high side right now with a price-to-earnings (P/E) ratio of 77.73. That’s much higher than the average P/E ratio of 25 among technology stocks listed on the Nasdaq exchange and the highest level for Nvidia in the last 10 years. However, given its huge growth, it is unlikely that Nvidia’s stock will ever be considered cheap. At least, the company is generating real products, sales and profits for investors — trends that are likely to continue for the foreseeable future.
Buy The Dip In NVDA Stock
Investors looking to add a great technology stock to their portfolio this year should definitely consider buying the current pullback in Nvidia’s share price. The stock is not likely to remain down for long and Wall Street expects more gains ahead. The median price target on Nvidia’s stock is currently $350 a share, which implies a 38% gain from current levels. Even if the Arm acquisition does not proceed as planned, there remain plenty of reasons to like Nvidia and its future outlook.
Deal or no deal, NVDA stock is a buy.
On the date of publication, Joel Baglole held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
