An undeniable hallmark of 2022 has been the bear market and the resulting volatility on Wall Street. Macroeconomic conditions, including near 40-year-high inflation and the unrelenting rise in interest rates, have exacerbated these issues with no end in sight. These factors have punished the Nasdaq Composite, which has declined 28% so far this year.
It’s important to flip the script on these challenges, remembering that a falling market takes down good stocks with the bad, presenting a rare opportunity to buy top companies at incredible discounts. Nvidia (NVDA -1.46%) could well be the poster child for this phenomenon, going from market darling to pariah in just months and shedding as much as 63% of its value. Yet, the company’s high-end graphics processing units (GPUs) are practically indispensable for serious gamers and are a staple the world’s largest cloud computing and data center operations.
A review of the evidence suggests this temporary fall from grace provides investors with a compelling opportunity to buy Nvidia stock before an eventual rebound that, by all accounts, will be stunning.
It isn’t all fun and games
It’s understandable that fair-weather investors and those with a short-term outlook were spooked by the semiconductor maker’s most recent results. For its fiscal 2023 second quarter (ended July 31), Nvidia’s revenue of $6.7 billion grew just 3% year over year. The culprit? Gamers have delayed upgrading to the latest processor because of the current economy. Revenue in the company’s gaming segment — Nvidia’s cash cow — slumped 33% year over year.
Yet it isn’t just Nvidia that’s suffering. The global PC market experienced a significant decline in the second quarter of 2022, as total shipments of notebooks and desktops tumbled 23% year over year. At the same time, however, Nvidia not only maintained, but increased its lead in the discrete desktop GPU market with an 80% share, up from 75% in the first quarter. This continued dominance suggests that once the economy rebounds, so too will Nvidia.
Fair to partly cloudy?
Nvidia’s most recent results weren’t all bad, as the company’s data center division generated $3.81 billion, up 61% year over year, and notching a new quarterly record. The segment, which provides processors used in data centers, cloud computing, and artificial intelligence (AI), remained remarkably resilient, even as businesses battened down the hatches for the continuing economic storm.
The company continues to be the go-to provider for semiconductors that facilitate the movement of information around data centers and enable the vast cloud computing operations of each of the major cloud providers. Alphabet‘s Google Cloud, Amazon Web Services (AWS), and Microsoft Azure all rely on Nvidia’s processors, as do Baidu Cloud, Alibaba Cloud, and Tencent Cloud.
In fact, when the U.S. government recently issued a ban on sending high-end AI and data center chips to China, Nvidia quickly developed a semiconductor to meet the needs of its customers in the country while still complying with the recently issued government mandate. This was a critical step to protecting its cloud and data center business, which represents the company’s biggest growth area.
While estimates vary, the cloud computing market is expected to surpass $480 billion in 2022, achieving a compound annual growth rate (CAGR) of 19.9% over the next seven years and growing to $1.7 trillion by 2029. The strength of this secular trend and its industry-leading position will continue to drive Nvidia’s growth for years to come.
There’s little doubt that gaming and cloud computing are the company’s biggest opportunities, but they’re not the only ones. Nvidia continues to be a major player in the nascent area of self-driving cars and trucks. We now know it will likely take longer than originally anticipated to develop fully autonomous vehicles, but Nvidia is a key provider of the hardware and software necessary to enable this breakthrough technology.
Don’t take my word for it: Nvidia is partnered with more than 120 movers and shakers in the industry, including car and truck makers, tier 1 automotive suppliers, robotaxi services, and simulation, mapping, sensor, and software companies. While the technology may not be ready for prime time right now, Nvidia is well positioned to benefit when it eventually makes the grade.
The future’s so bright, I gotta wear shades
This all goes to show that while the current economy is weighing on Nvidia’s results, the company is in good shape for a serious rebound once things improve.
Nvidia had record-setting sales last year of $26.9 billion, which shows it’s the current environment weighing on sales. That’s a drop in the ocean compared to its total addressable market, which management estimates at more than $1 trillion.
A final note: Nvidia stock is not now, nor has it ever been, cheap in terms of traditional valuation metrics. It is, however, cheaper than it’s been in years — currently trading for roughly 9 times next year’s sales. While most investors consider a reasonable price-to-sales ratio to be between 1 and 2, high-growth stocks are typically deserving of a higher premium — and Nvidia certainly falls into that category.
Nvidia’s leadership in not one, but two industries, a large addressable market, and strong secular tailwinds give the company all the ingredients necessary to prosper for years to come. That’s why Nvidia is my top stock for 2023 and beyond.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet (A shares), Amazon, Baidu, Microsoft, Nvidia, and Tencent Holdings. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Baidu, Microsoft, Nvidia, and Tencent Holdings. The Motley Fool has a disclosure policy.
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