The 100 largest technology companies on the Nasdaq stock exchange are listed on the Nasdaq-100 Index. It took a pounding in 2022, sinking 33% as high-growth tech companies quickly fell out of favor with investors. Many individual technology stocks fell even further, resulting in the worst market downturn in more than a decade.
Yet these dark economic clouds hide a silver lining. A review of the yearly returns of the Nasdaq-100, dating back to its debut in 1985, reveals that only once has the index experienced back-to-back declines -- during the burst of the dot-com bubble between 2000 and 2002. What's more, the positive years following a decline have been particularly lucrative for investors, averaging gains of nearly 56%.
To be clear, challenges remain in 2023. These macroeconomic headwinds include historically high inflation, still-rising interest rates, and -- more recently -- a couple of high-profile bank collapses. That said, the data suggests that the Nasdaq could be poised for a remarkable comeback this year.
With that as a backdrop, let's look at one remarkable growth stock that has been hard hit but is setting the stage for a stunning rebound.
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Fueled by a boom in artificial intelligence
The recent debut of OpenAI's ChatGPT has cast a spotlight on emerging artificial intelligence (AI) technologies, resulting in renewed interest from investors. The popular chatbot attracted a record 100 million users in January, just two months after its public launch in November. Other companies are quickly jumping on the AI bandwagon, reluctant to be left behind. While it's too early to know who will ultimately win the chatbot wars, Nvidia (NVDA 2.77%) is well positioned to profit from the ongoing trend. Here's why.
Microsoft (MSFT 0.94%), an early investor in OpenAI, recently announced a new $10 billion investment, while also integrating ChatGPT into its Bing search engine. In a blog post released just this week, Microsoft revealed that this AI-powered chatbot was powered by Nvidia technology. Thousands of Nvidia AI-centric graphics processing units (GPUs) had been strung together to generate the computational horsepower necessary to train and maintain the system.
That could be just the beginning. This week, OpenAI launched the upgraded GPT-4, while Microsoft Azure Cloud introduced virtual AI machines powered by Nvidia's high-performance H100 semiconductors connected by its Quantum-2 InfiniBand networking technology. Making this cutting-edge AI available to cloud customers marks the next phase in the AI revolution, which is built on Nvidia technology.
This growing opportunity is in stark contrast to the stock's performance last year, when it lost half of its value. Even after a rebound this year, Nvidia stock is still down 29% from its peak, but the future looks bright. After a couple of punishing quarters, CEO Jensen Huang said things appear to have turned a corner. "Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering," he said. The company is also joining forces with a wide range of cloud service providers to offer AI-as-a-service. Partners include Alphabet's Google Cloud, Oracle Cloud, and Microsoft Azure, with more deals coming soon.
NASDAQ: NVDA
Key Data Points
Remarkable resilience in the face of gale-force headwinds
For fiscal 2023 (which ended Jan. 29), Nvidia's revenue of $27 billion was flat year over year, the result of record comps and economic headwinds, while profits declined 55% -- but the devil is in the details. Three factors weighed on the company's bottom line: A $1.35 billion termination fee from its abandoned bid to acquire chipmaker Arm; a $2 billion hit to revenue costs resulting from rampant inflation; and a $2 billion increase in research and development (R&D) spending. I'm not concerned about the R&D, as it precedes new product launches. And the termination fee was a one-time charge and when inflation cools, product-related costs will come back down.
As recently as the fiscal 2023 first quarter (which ended May 1) Nvidia was firing on all cylinders, generating record quarterly revenue, fueled by record performances from its gaming and data center segments. This suggests that the current economic conditions are the culprit, temporarily weighing on its results. Once the inevitable recovery begins, Nvidia stock is poised to soar.
The fine print
There are two factors that bear noting. First, no one knows when the market will bottom, and anyone that claims to have insight is whistling in the dark. The best investors can hope for is to buy quality stocks at discounted prices and wait for the rebound. Nvidia certainly fits the bill in that regard. Second, Nvidia is not now -- nor has it ever been -- cheap in terms of traditional valuation measures. Value-oriented investors might simply refuse to pay 16 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2.
That said, companies with a strong history of growth and outstanding prospects are often rewarded with higher premiums, and Nvidia is no exception. If history repeats itself and the Nasdaq-100 Index soars this year, investors in the market for a surefire winner might want to consider Nvidia's proven track record and undeniable growth prospects.
