The divestment in the wider market has seen several excellent companies trade well below their recent highs. Especially the stock price of Nvidia (WKN: 9189422, 2.00%) has fallen 48%.
Understandably, many investors are wondering if it is a good idea to buy Nvidia shares now. Let’s take a closer look at Nvidia’s prospects, compare them with the company’s valuation and decide whether long-term investors should buy now.
Nvidia can take advantage of huge opportunities
Nvidia’s sales are driven by several influential market trends, including gaming, artificial intelligence, data centers, autonomous car development and 5G communications technology. These forces have driven the company’s revenue from $ 4.3 billion in 2013 to $ 26.9 billion in 2022.
Even more impressive is that the company increased its gross profit or operating profit margin. The former has increased from 52% to 65% from 2013 to 2022, the latter from 15.1% to 37.3% in the same period. Demonstrated economies of scale are a good indicator of a company’s ability to grow its profits over time.
NVIDIA OPERATIONS MARGIN (LAST 12 MONTHS), YCHARTS DATA
This is a good sign, because the trends that have driven growth so far have the potential to continue for several years to come. One area that could kick-start the next sales growth is self-driving cars. In fiscal 2022 (the 12-month period ended January 30), the segment generated only $ 566 million of the company’s $ 26.9 billion in total revenue. So far, Nvidia processors have been used primarily in car infotainment systems. With self-driving cars, Nvidia could control all software and hardware.
A major risk for Nvidia, of course, is the use of its chips for cryptocurrency mining in recent years. The connection correlates the sales of these chips with the prices of the digital assets. Falling cryptocurrency prices could affect sales of Nvidia’s mining support products. Colette Kress, Chief Financial Officer of Nvidia, commented on this fact on February 16:
Our GPUs are capable of extracting cryptocurrencies, but we have a limited overview of how much this affects our overall GPU demand. Volatility in the cryptocurrency market, including changes in cryptocurrency prices or transaction confirmation methods, such as proof of work or proof of effort, can affect the demand for our products and our ability to accurately assess them.
NVIDIA P / E, DATA OF YCHARTS
Although Nvidia shares have fallen 48% from the top, they are not cheap. With a price-to-free cash flow ratio of 45 and a price-to-earnings (P / E) ratio of 54, Nvidia is roughly at its average historical valuation on the above measurements. However, Nvidia is not expensive either. Investors can not be blamed for paying a reasonable price for an excellent company. Nvidia is undoubtedly a great company that increases sales, expands the advances and develops innovative technologies that are hard to copy.
For these reasons, Nvidia is an excellent stock to buy now.
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This article was written by Parkev Tatevosian and was published on Fool.com on 19/05/2022. It has been translated so that our German readers can participate in the discussion. Parkev Tatevosian owns none of the aforementioned shares. The Motley Fool owns shares in and recommends Nvidia.