Most growth stocks have been punished so far this year, despite healthy fundamental performance from many of the underlying companies. While it's hard to own these companies that are thriving financially but dropping in value, this disconnect between the stock price and business quality creates attractive investment prospects for long-term investors.
Nvidia (NVDA 6.18%) and Airbnb (ABNB 0.75%) both fit this description. Shares of Nvidia and Airbnb are down 42% and 31%, respectively, yet both companies are thriving fundamentally. Therefore, if you have any extra cash to invest right now, you might want to put it into these two stocks.
1. Nvidia
Nvidia has been knocked around recently because of the company's preliminary second-quarter earnings results. Preliminary results for Q2 2023 (ended July 31, 2022) came in far below Nvidia's original guidance, with total revenue now expected to clock in at $6.7 billion instead of the $8.1 billion the company was originally anticipating.
This was partly due to decreasing demand in the company's gaming segment. Nvidia's gaming business is one of its biggest segments, representing almost 44% of total revenue in fiscal Q1 (which ended May 1, 2022). According to Nvidia's Q2 preliminary results, this segment will generate $2.04 billion in revenue this quarter, representing a 33% year-over-year decline.
However, there's more to this than meets the eye: This is an industry-wide issue. Advanced Micro Devices (AMD 2.37%) also saw demand for gaming graphics processing units decline when it reported Q2 earnings on August 2, 2022.
Another bright spot is that the business sees stable development in the rest of its business segments. Nvidia still expects data center revenue to shoot 61% higher year-over-year to $3.8 billion in Q2, and anticipates automotive revenue to expand 45% over the same period.
While gaming makes up a sizable chunk of revenue today, that could change over the long term. Nvidia sees a $1 trillion opportunity ahead, and gaming only makes up $100 billion of it. The rest comes from its fast-growing operations, like automotive and data center, and emerging business segments like AI software. Therefore, the products that could shape Nvidia's future are still performing very well.
Add to this the company's impressive profitability, and Nvidia looks appealing at these discounted prices. Even after this revenue decline in Q2, the company is still expecting operating income to reach $4.3 billion in the quarter, representing a year-over-year increase of 75%.
Nvidia is still seeing adoption in the markets that could drive long-term success, and profitability is soaring higher in the process. With the company noticeably cheaper than it has been in the past few months, investors might want to add a little chunk of Nvidia to their portfolios to capitalize on this lucrative market.
2. Airbnb
According to the U.S. Travel Association, travel spending surpassed 2019 levels for the third consecutive month in June, hitting a new post-pandemic spending record of $105 billion in the U.S.
Airbnb took advantage of this in Q2, as the company saw an all-time high number of nights and experiences booked on the platform in the quarter. Importantly, this helped this innovative hospitality stock achieve impressive profitability. In Q2, net income reached $379 million -- its second-best quarter in terms of profitability over the past three years -- and free cash flow hit $795 million.
The benefits of this short-term activity boost could help Airbnb thrive over the long term. This immense cash generation can enable the business invest heavily into product development in the future, setting its platform apart from rivals. Airbnb has a history of continuous innovation, and with an announcement of upgrades coming in the winter, this trend looks like it will only accelerate as Airbnb obtains more cash to invest back into the business.
Despite reaching historically high demand and profitability levels, shares have fallen substantially this year. This has brought the company's valuation down to an attractive level of 25 times trailing 12-month free cash flow -- much lower than rivals like Marriott International and Hilton Worldwide.
Many investors believe that Airbnb's success will dwindle as travel demand subsides, but this boost could actually allow them to spring ahead of rivals as it invests in making the best platform in the space. At these prices, Airbnb could provide strong returns over the long haul, which is why you might want to invest now.
