Nvidia stock was hit hard. An investor explains why it might be time to buy.

David Paul Morris/Bloomberg

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Nvidia (NVDA) stock, like many tech stocks, has fallen from its 2021 high. But with the “metaverse” providing a tailwind, it may be time to buy.

Shares of


Nvidia

fell more than 25% from their late November high of $333.76, a decline technically defined as a bear market. There is nothing fundamentally wrong with Nvidia. Its failed acquisition of chip designer ARM was an overhang, and it and other high-growth stocks have been hurt because the Federal Reserve is preparing to raise interest rates, which at the end of the account, is worth the future profits of growing companies like Nvidia. less.

Now buying the dip makes a lot of sense.

Yes, Nvidia should make a lot of money in the future. It provides the technology for the Metaverse, which represents a whole new sales opportunity. The company encodes new software into its graphics, data center and automotive chips, software it monetizes by raising the price of chips, such as those that go into new Metaverse products. Nvidia is “one of the best players in the Metaverse,” said Rhys Williams, chief investment officer at Spouting Rock Asset Management, which owns the stock. “They touch every touchpoint on where the world is headed.”

This will help drive sales and profit growth for years to come. Analysts expect the company’s sales and earnings per share to grow at annual rates of 20% and 25%, respectively, over the next five years. That brings sales to $56.2 billion and earnings per share to $11.02 by 2026, according to FactSet.

Rising profit margins will help drive EPS growth. The software business generates higher margins, and as this segment intensifies, it is expected to drive Nvidia’s operating margin to 58% by 2026, from 47% expected in 2021.

Yet earnings forecasts still look too low as the consensus implies a sharp drop in sales from 60% growth in 2021 to 20% on average over five years. This massive drop in growth rate seems unlikely, Williams says. “It would be a huge deceleration,” Williams said. “I expect them to do better than the consensus,” as management typically sets a conservative sales estimate for analysts, he added.

But even if earnings fall short of expectations, their growth can still drive the stock higher because it’s not trading too expensive. At 44x 2022 EPS expectations, the PEG ratio – price-to-earnings ratio divided by expected earnings growth – is just 2x, below its 5-year average of 3x.

“[The] the stock may well appreciate,” Williams said.

Nvidia stock, which is expected to report earnings on Feb. 16, rose 2.7% in premarket trading on Wednesday.

Write to Jacob Sonenshine at [email protected]