Semiconductor company Nvidia (NVDA +4.30%) has had a rough year, falling more than 50% from its high as volatility continues to shake Wall Street.
Worries over a potential recession could further pressure shares; semiconductors have traditionally been an industry of booms and busts.
It might feel wrong, but here's why leaning into the uncertainty rather than avoiding it could prove lucrative for Nvidia investors in the long run.
NASDAQ: NVDA
Key Data Points
Short-term industry challenges?
Nvidia is the market leader in discrete graphics processing units (GPUs), which are used heavily in specific applications like gaming, cryptocurrency mining, artificial intelligence (AI), and others where high computing power is needed.
There's increasing talk about a potential recession, which could mean less consumer spending and less demand for semiconductors. There's already an ongoing bear market in cryptocurrency, which could discourage people from investing in the GPUs and other resources needed for mining.
Nvidia guided for solid fiscal 2023 second-quarter performance, calling for $8.1 billion in revenue, a 24% year-over-year increase. The fiscal 2023 first quarter ended May 1, so the second quarter will cover May through July; investors will want to pay close attention to management's guidance for the next quarter. It could provide a good look at how management expects the business to perform in the fall if the economy does slow down in the coming months.
Long-term opportunities remain intact
It's possible that a recession does come, and Nvidia's growth will slow. But this is where having a long-term time horizon can be an investor's superpower. You don't need to worry about the short-term ups and downs of the industry; you can focus on the big picture.
The long-term need for semiconductors figures to rise dramatically over time. Research firm McKinsey estimates that the global market for semiconductors could grow from $600 billion to $1 trillion by 2030.
AI could play a big part in this demand. Emerging technologies like autonomous vehicles, digital-world creation, and edge computing require computing power on site and in data centers to support the immense loads of information generated.
Nvidia's data center business ended fiscal 2022 on a $13 billion revenue pace, up from just $5 billion two years prior. The company was the world's market leader in discrete GPUs (meaning dedicated GPUs instead of ones being built into the computer processor) at 83% in 2021.
Nvidia could capture much of this industry growth and has built an extensive ecosystem to protect its market share. It's developed a full stack for AI, providing the GPU hardware, software, and developer tools for a turnkey system to create AI technologies on top of Nvidia's products.
What does all of this mean? The semiconductor market might hit the occasional bump, but Nvidia is still poised to grow over the years ahead. Semiconductors are the building blocks of technology, and the world will only need more as time goes on.
Buying into the pain
Understandably, people typically hate buying when stocks go down; it can feel painful and only worsen if the stock keeps falling after you buy. Nobody knows what a stock will do tomorrow.
But isn't a falling share price good if you're optimistic about the company's long-term direction? It's like getting something on sale; you should embrace the market's discount.
Below, you can see Nvidia's price-to-earnings ratio (P/E), which shows you how much you're paying for a piece of Nvidia's profits. People were happy to pay more than $300 for the stock, despite getting a poor value on their investment. The stock traded at a P/E of about 105 at its peak! The S&P 500 historically trades at a P/E of about 15, so Nvidia is very expensive compared to the broader market.
But now, the stock's valuation has fallen dramatically to a P/E of 42, its lowest since late 2019. Analysts expect Nvidia to grow earnings per share (EPS) by an average of 16% annually over the next three to five years, a slowdown from the 43% rate it averaged over the previous five years.
It's hard to call Nvidia a bargain with that in mind, but as the market leader in discrete GPUs, growth could accelerate during the next market cycle for semiconductors. Buying cyclical companies during moments of weakness can be a great way to position your portfolio for long-term rewards.
