Nvidia Stock: Bear vs. Bull
Nvidia (NASDAQ: NVDA) shares have skyrocketed in 2023, rising 41% since Jan. 1. Investors have rallied as the company looks more likely to play a crucial role in the future of artificial intelligence (AI). Since the launch of OpenAI's ChatGPT, an advanced chatbot capable of producing human-like dialogue, in November 2022, all eyes have been on companies with the tech to drive the industry forward.
While Nvidia likely has much to gain from AI over the long term, a steep decline in the PC market in 2022 has increased its stock price volatility. Until the market recovers, knowing the best time to invest in Nvidia might be difficult.
As a result, there are bears and bulls regarding Nvidia's stock. So let's take a closer look at both arguments.
Bear: A majority market share in a burdened industry
Amid an economically challenging 2022, the PC market was hit hard. Rising inflation led to steep declines in consumer spending on tech, with worldwide shipments of graphic processing units (GPUs) falling 42% throughout the year. Some of the industry's biggest players watched their stocks plummet, with Nvidia's, AMD's, and Intel's shares falling between 48% to 55% throughout 2022.
Last year's market declines led revenue in Nvidia's historically highest-earning segment to plunge. Its gaming segment, primarily made up of GPU sales, saw revenue fall 51% year over year in the third quarter of 2022 to $1.57 billion. While competitors like AMD and Intel suffered from the market's declines, Nvidia was hit the hardest thanks to its 88% market share in the consumer GPU market.
Nvidia's substantial stock decline in 2022 due to poor GPU sales, followed by a 41% rise since Jan. 1 based on AI prospects, has led to high volatility in its stock price. The discrepancy means the company's shares are currently trading at 62 times its earnings, as the recent rise is based on optimism that hasn't yet paid off financially.
Despite the short-term volatility, Nvidia's past stock performance might still make the company worth an investment. Its shares have risen 240% over the last five years and 6,600% over the last decade. As a result, it might be best to keep a long-term perspective with Nvidia's stock, making its current price a buy no matter the temporary headwinds.
Bull: Nvidia leads the way in two high-growth markets
While Nvidia's earnings suffered from a decline in the PC market, its saving grace was undoubtedly its strong position in data centers, which kept the company growing despite economically challenging conditions. In Q3 2022, data centers earned the largest portion of revenue, with the segment reporting a year-over-year revenue rise of 31% to $3.83 billion.
The immense growth is primarily owed to the $3483.98 billion cloud market, projected to expand at a compound annual growth rate (CAGR) of 14.1% through 2030 (per Grand View Research). Data centers are crucial to that growth, with GPUs like Nvidia's powering cloud titans such as Amazon Web Services and Microsoft's Azure. As more employees opt to work from home and online businesses expand, the cloud market will grow, and so will the need for data centers.
Moreover, Nvidia's GPUs have the power to run and develop AI software, making the company's tech crucial to the burgeoning industry. The AI market was valued at $136.55 billion in 2022 and is expected to grow at a CAGR of 37.3% through 2030. With the almost limitless potential of AI in numerous industries from consumer tech, healthcare, design, education, self-driving cars, and much more, Nvidia could profit from the market's growth for decades.
Nvidia's shares have soared since Jan. 1, with its stock price not exactly aligning with its recent financial performance. With an earnings release in a matter of days and expectations of further declines in consumer GPU revenue, its stock could slide to a more appealing price.
However, it might be best to focus on Nvidia's long-term prospects, no matter the case. The company's stock has grown immensely over the last five and 10 years. Meanwhile, a pivot to data centers and AI could see its business soar over the next decade, making now an excellent time to invest in Nvidia's stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon.com, Intel, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.
