These are challenging times for investors, as the Nasdaq Composite has languished in a bear market since earlier this year, down more than 25% from its November high. Many technology stocks have fallen even further, weighed down by fears of economic headwinds and the "is-it-or-isn't-it" recession.
This has created some compelling opportunities for investors with a long-term outlook. Identifying stocks with the rare combination of a best-in-class offering, a large addressable market, and a significant secular tailwind can generate life-changing returns.
1. Nvidia
Nvidia (NVDA 3.65%) made a name for itself as a pioneer of graphics processing units (GPU). Since those humble beginnings, it has become the undisputed leader in the discrete desktop GPU market, commanding a 78% share in the first quarter. A recent slowdown in its flagship gaming segment has punished the stock, which has lost more than half its value, but forward-looking investors will recognize this for the opportunity it is.
The market for computer chips has always been cyclical, and recent economic headwinds have temporarily stunted demand for Nvidia's state-of-the-art gaming processors. When the economy recovers, as it no doubt will, gamers will be back in the market to upgrade to Nvidia's latest offering.
In the meantime, the digital transformation is ongoing, with businesses adopting cloud computing at a breakneck pace, and Nvidia chips are the processor of choice for all of the leading cloud providers and data center operators. As a result, Nvidia's data center segment has held up well, with revenue from its fiscal 2023 second quarter (ended July 31) up 61% year over year, even as gaming revenue slumped 33%. This resulted in overall revenue that grew 3%, while net income tumbled 72%.
Short-term challenges remain, but it's important to put them in the context of the longer-term opportunity. In fiscal 2022 (ended Jan. 30), Nvidia generated record revenue of $26.9 billion, but that pales in comparison to its overall opportunity. Management estimates Nvidia's total addressable market, which includes gaming, cloud, artificial intelligence, automotive, and the metaverse, at $1 trillion.
Finally, Nvidia's temporary growth slowdown notwithstanding, the semiconductor specialist has risen more than 4,000% over the past decade, driven higher by its consistently high growth. Its industry leadership, massive opportunity, and strong tailwinds make Nvidia one stock that could help set you up for life.
2. The Trade Desk
In the face of the recent economic downturn, some investors fled digital advertising stocks. History has shown that marketing is one line on the income statement that companies will cut without a second thought in times of economic uncertainty. The results from numerous ad-tech companies seemed to confirm those fears, as one after another reported weaker-than-expected growth.
Imagine investor surprise when The Trade Desk (TTD 4.15%) bucked that trend, showing once again why it's an industry leader in programmatic advertising. In the second quarter, revenue grew 35% year over year, as marketers flocked to The Trade Desk's proven results and transparent advertising rates. On an adjusted basis, earnings per share grew 11%, even as the company invested heavily on Solimar, the latest version of its high-speed platform, and OpenPath, which provides customers with direct access to ad inventory.
The Trade Desk is not only the fastest-growing ad-buying platform, but it also has strong relationships with all the major ad agencies. Furthermore, the company's Unified ID 2.0 -- its open-source identity framework -- is the heir apparent to third-party ad-tracking cookies, which are headed for the scrap heap. These advantages make it difficult for rivals to compete in a meaningful way.
CEO Jeff Green has stated, "Over time, I believe that nearly all advertising will be digital, and nearly all of it will be executed programmatically." These secular tailwinds play to The Trade Desk's strengths. Additionally, the total advertising market is currently estimated at about $750 billion and is expected to top $1 trillion over the next several years. That gives The Trade Desk a large and growing addressable market.
Finally, The Trade Desk has only been publicly traded since late 2016 but has made a splash during that time, with its stock up more than 2,000% since its debut -- even after the recent decline. This suggests that investors should stake their claim now before the market comes to its senses.
A word on valuation
It's important to note that all this robust growth comes at a cost. Neither of these companies is cheap in terms of traditional growth metrics. The Trade Desk and Nvidia are currently selling at 16 times and 12 times next year's sales, respectively, when a reasonable price-to-sales ratio is typically between 1 and 2.
However, given their continued robust growth, large addressable markets, and the secular tailwinds driving them forward, both Nvidia and The Trade Desk are deserving of a premium valuation.
