Market volatility wasn't kind to leading tech stocks last year. Some companies with significant growth opportunities saw their share prices cut in half in a matter of months. With valuations much lower, now is a good time to go shopping.
NVIDIA (NASDAQ:NVDA) and Electronic Arts (NASDAQ:EA) are in different industries but have one thing in common: each serves the growing $135 billion video game industry. NVIDIA is the market-share leader in selling graphics cards for PC gamers, while Electronic Arts is one of the leading game makers, known for its best-selling sports franchises Madden and FIFA. Here's why I think now is a great opportunity to buy these stocks.
NVIDIA stock got hammered toward the end of 2018 over a significant slowdown in sales stemming from an oversupply of graphics cards in the gaming segment and a deceleration in data-center spending for graphics processing units (GPUs). However, the underlying trends in gaming, data center, and artificial intelligence that were causing NVIDIA to deliver impressive growth earlier last year are not going away, which means the recent slip in performance presents long-term investors an excellent opportunity to buy the stock at a discount.
There are a few reasons why NVIDIA stock may rise from here. First, management explained on the latest investor conference call in February that the GPU supply levels in the gaming segment will normalize during the fiscal first quarter. This could reboot the gaming segment's revenue growth as we move through the year. More people are playing games, and most PC gamers are still playing on older graphics cards. NVIDIA just launched the new GTX 1660 Ti graphics card that's based on the new Turing architecture and delivers outstanding performance per dollar of any gaming GPU in the market currently. The 1660 Ti could prove to be a convincing upgrade for gamers on a budget who want high-end performance out of their GPU to play the latest games.
Second, while revenue growth in the data center segment slowed dramatically to 12% year over year in the fiscal fourth quarter, full-year data center revenue increased 52% year over year. Given the slowdown in China's economy and the uncertainty about the potential domino effect around the world, cloud providers held back on spending for their data centers and decided to work through existing capacity, which contributed to NVIDIA's sluggish quarter.
However, Alphabet recently announced plans to spend $13 billion on data centers this year, up from $9 billion in 2018. As tech giants continue to collect data, there will continue to be a need for high-performance computing, and NVIDIA is a leader in delivering fast processing speeds for data-intensive applications like artificial intelligence and self-driving cars.
NVIDIA continues to see the data center space as a tremendous long-term opportunity, which is why it just recently inked a $6.9 billion deal to buy Israel-based Mellanox Technologies, a leader in interconnect technology for data centers. The stock is up 27% year to date, but the shares still look like a buy at a P/E ratio of 25.6.
It's been a similar story for Electronic Arts. The stock got slammed at the end of last year over a few things: the delay and subsequent soft launch for Battlefield V, and slowing growth in in-game spending (or live services). Plus, mobile game revenue was weak, and the company had a difficult time converting FIFA 18 players over to the new FIFA 19. These are challenges, but I fully expect EA to bounce back for a few reasons.
First, management describes themselves as a "learning organization." They admit that they made errors in some of their decisions that led to the company's recent underperformance. For example, CEO Andrew Wilson acknowledged that it was a mistake not to prioritize the multiplayer side of Battlefield V given the enormous popularity of online competitive gaming right now. They stated during the last investor conference call that they would adjust to get the company growing again.
One of the ways they are already demonstrating their ability to refine their strategy is the latest release of Apex Legends. The game offers a fresh take on the battle royale genre, and it has proven to be a hit since its release in February. Apex Legends gives EA a foothold in expanding into the lucrative free-to-play market, where the company could have an excellent opportunity to monetize a potentially sizable player base going forward.
Also, keep in mind that EA is a large, diversified game maker, with several best-selling franchises across console, PC, and mobile, and these games generate a lot of revenue and profit. The company expects to make $4.875 billion in revenue for fiscal 2019 (which ends in March) and operating cash flow of $1.35 billion. Both of those figures will be down over last year, but I expect EA will return to growth over the next few years given the growth of the industry, its ability to adapt and learn (Apex Legends), as well as new money-making opportunities in esports and cloud gaming. The stock currently trades for a forward P/E ratio of 22.7.