Nvidia stock falls from 300 level in November 2021 to half of its value at approximately 150 level in June 2022. Is this a rare opportunity or an alarming bell for the chip industry? We try to analyze its revenue, business model, and issue regarding the chip industry. In the end, we hope the investor could answer: Is Nvidia a bargain stock to buy?
Chapter 1: The Unholy Trinity – Russia, China, Inflation.
With regard to them, is Nvidia a bargain stock to buy?
Micron said that the three-factor – China lockdown, Russia war, and inflation – will weaken demand for chips. Some headlines relate this statement to the fall of Nvidia stock.
Inflation is an easy choice of scapegoats since it impacts directly customers. And because inflation is increasingly popular in headlines, it is easier to blame and associate it with any stock fall. The premise is simple, inflation weakens the buying power of people, so they will spend less on computer devices.
Let’s check the reality – the number.
Almost 50% of Nvidia’s revenue is contributed by the data center. In simple terms, the data center could be called an AI segment. It powers cloud providers like Amazon to deliver its AWS. Or Microsoft to live up to Azure. The cloud provider has the software, OS, and IT while Nvidia has the physical chips that are used for the execution of that cloud services.
So as long as Amazon and Microsoft operate, Nvidia is just fine.
Another ‘almost 50%’ – yes, right – is supplied by the gaming segment. The conversation about inflation is relevant in this segment. When your bill soar, it is hard to imagine you will buy more gaming gear for your PC.
Chapter 2: The Memories.
A closer look at Micron make answering is Nvidia stock a bargain become easier.
The clients of Micron and Nvidia are significantly different. Micron is a supplier of PC and smartphone memories while Nvidia provides GPU for cloud companies. Micron is more consumer-centric while Nvidia is more business-centric. As consequence, Micron will be more impacted by inflation than Nvidia (1).
So, if Micro tells us that the chip demand will be weakened in the next quarter, it is its chip – not Nvidia chips. The gaming segment surely will be affected, but as long as cloud providers like Microsoft and Amazon keep expanding, so the Nvidia.
Now about China Lockdown and Russia
Russia’s war is a horrible event, but it does not need to translate into a financial threat for the chip company. The largest client for both Micron and Nvidia is mostly US-based. China’s lockdown seals the people at home and restricts the economy but still, it can’t be blamed for the waning demand for chips.
- A company that has similar characteristics to Micron is Intel and AMD since they package their chip into laptops and PCs that are highly impacted by inflation.
- 74% of Micron’s revenue comes from DRAM.
Chapter 3: The Takeaways
The Wall Street and Main Street. The Reaction and The Reality.
The media always sell the headline. It is their job. The market may be overreacted, it is its character.
The real reason could be anything. Maybe the pandemic supercharges the growth that was unnatural, making gaming become heaven when you can’t gather in public.
Perhaps it is too overpriced in the past.
We may never know.
But we are not analysts, we are investors. We see a margin of safety. A 50% discount from the all-time high for companies with a decent competitive advantage that offer growth like metaverse, and cloud computing.
We are ready to buy at any significant dip.