We're buying more shares of this chipmaker and updating our price target

Published Thu, May 26 20229:00 AM EDTUpdated Thu, May 26 20229:48 AM EDT

We're buying 50 shares of Nvidia (NVDA) at roughly $163.51 each. Following Thursday's trade, the portfolio will own 325 shares of NVDA, increasing its weighting to about 1.91% from 1.62%. In line with our takeaway from Wednesday's earnings analysis , we are stepping up to the plate and picking up a portion of the shares we sold in early April at around $220 per share. As noted in our alert, we believe the headwinds posed by China's Covid lockdowns and Russia's invasion of Ukraine have largely been reflected by the multiple contraction we've seen this year. Guidance missed expectations due to a $500 million headwind from these crises. Sell-side analysts didn't update their estimates, but the buy side (those that actually buy shares) seemed prepared for it: Shares appear ready to open above Wednesday's opening level of $160 per share. We believe shares are attractive at current levels, especially for those investors looking to hold Nvidia for at least the next year to 18 months. Moreover, data center sales were strong, despite networking products remaining supply-constrained. Management expects further growth on a sequential basis. And while gaming is seeing the bulk of that $500 million expected revenue headwind, we were encouraged by management's commentary surrounding the longer-term underlying dynamics of the industry, including 100 million new PC gamers over the past two years. Ultimately, we believe the weakness is temporary and the long-term opportunity remains as attractive as ever. Remember, it's not just about the chips anymore. Nvidia has created an incredible software opportunity via the omniverse and tying together of its various other software platforms. On the call, management reminded investors, "the creator economy is estimated at $100 billion and powered by 80 million individual creators and broadcasters." To put that $100 billion opportunity into context, we should note that Nvidia is expected to generate about $35 billion in sales this year. While we are hesitant to call a bottom in this market, we do believe the stock has become de-risked. The China/Russia headwinds have now been quantified by management and any relief on either of these fronts could provide upside to the forecast. With shares now trading at their lowest valuation (on a forward price-to-earnings basis) since March of 2020 — and their lowest valuation on a growth adjusted basis (represented by the "PEG" ratio) since the end of 2019 — now is a good time to step back in. For a more in-depth look at what we mean when we call out these valuations, be sure to check out our previously published alert on " Making sense of the multiples approach to valuing stocks ." With this buy, we are lowering our price target to $250 from $345 to reflect the multiple contraction. This target represents approximately 38 times calendar year 2023 earnings estimates, a multiple largely in line with the prior 5-year average. It&#