The 2022 market correction was a wake-up call for investors that stocks can fall quite sharply. As frustrating as corrections and bear markets can be, it's worth remembering that the S&P 500 index is up 345% since the bottom of the 2008 market crash. The market can be extremely volatile sometimes, but these are the times when you want to be putting money to work in stocks.
To increase the odds of finding long-term winners, I like to focus on industry-leading companies that have major tailwinds behind them, such as trends where people are spending more time or certain technologies that companies are rapidly adopting.
Here are two stocks capitalizing on huge opportunities that are poised to outperform in the next bull market.
1. Take-Two Interactive
The video game industry offers investors attractive long-term returns, with Take-Two Interactive (TTWO 0.78%) being one of the standout performers in recent years. Take-Two is a leading maker of video games for Microsoft's Xbox, Sony's PlayStation, and PCs and mobile devices. From 2011 through 2021, the stock climbed 1,210%.
With the stock down 33% over the last 12 months, investors have a chance to own one of the top growth stocks in the industry at a better value.
The shift to a digital distribution strategy caused a windfall for leading game companies. Take-Two saw its profit margin increase from negative territory 10 years ago to over 15% at the end of 2021. The swell in profits sent the stock soaring and is giving management extra ammunition to invest in more growth.
The video game industry is expected to increase from $205 billion in 2020 to $282 billion by 2026, according to IDG Consulting. Take-Two has nearly doubled its development studio staff over the last four years. It currently has several titles scheduled for release over the next few years.
The recent acquisition of Zynga, the maker of Words with Friends and other popular titles on mobile, significantly expands Take-Two's development capabilities in the largest revenue segment of the video game industry. In the most recent earnings report, Take-Two reported mid-teens year-over-year growth in advertising bookings (a non-GAAP measure of revenue) on mobile -- a good showing in a slow economy that points to even higher growth when the market is stronger.
Considering future revenue from new releases and growth in Zynga's mobile business, Take-Two should be able to grow its bookings at a double-digit annualized rate over the next several years, based on management's forecast at the time of the acquisition. I believe investors who buy the stock today have a good chance of beating the market over the next five years.
2. Nvidia
Nvidia (NVDA -3.33%) is the leading supplier of graphics processing units (GPUs) used in gaming PCs and data centers. The stock delivered a 6,200% return over the last 10 years. The company successfully adapted its GPU technology used in consumer PCs for processing massive data workloads. This resulted in Nvidia's data center revenue increasing seven-fold over the last five years, and it's just getting started.
More companies are relying on artificial intelligence-powered analytics, voice chat, and recommendation systems. This is a strong tailwind that will push Nvidia through this turbulent economy toward more growth. These trends are expected to grow the GPU market at a compound annual rate of 33% through 2027, according to Mordor Intelligence.
However, gaming is still an important market for Nvidia, too. While the data center segment is now the company's largest business, Nvidia was generating over $3 billion in quarterly revenue a year ago in the gaming segment, where it probably also got a marginal boost from cryptocurrency mining. But the increasing realism of video games will only continue to attract more people to the hobby and fuel more demand, as it did over the last decade.
While Nvidia's gaming business experienced lower revenue over the last year due to macroeconomic headwinds, I wouldn't hesitate to buy the stock right now. A recovery in gaming is a catalyst for Nvidia. In fact, the stock is already up 30% year to date, as investors anticipate stabilization in the gaming business this year.
Beyond 2023, analysts expect Nvidia to grow earnings per share at an annualized rate of 21% over the next five years. That's consistent with Nvidia's previous growth and could deliver equally impressive gains for investors.
Nvidia is one of those stocks you want to look for opportunities to buy over time instead of selling. Companies will continue to adopt advanced chips and software to distill more insights about customer behavior, among other uses for Nvidia's high-powered GPUs. These global trends, along with the company's dominant market share position, make me confident in the stock's return potential.
