The 2022 bear market was brutal for investors, especially those exposed to the tech-heavy Nasdaq Composite index, which is down roughly 15% over the last 12 months. But downturns price a lot of bad news into company valuations, helping set the stage for future recovery.
With that said, let's explore why tech giant Nvidia (NVDA 3.65%) could be an excellent way for investors to bet on the next bull run in stocks.
What is Nvidia?
Founded in 1993, Nvidia has grown to become a leader in the design and manufacture of graphics processing units (GPUs) and other advanced computer hardware. Historically, the business has boomed on the back of mainstay industries like video gaming, data centers, and cryptocurrency mining, which make substantial use of its cutting-edge products.
But while shares have risen 78% in 2023, they are still down roughly 24% from an all-time high of $333, reached in November 2021.
Like many growth stocks, Nvidia's valuation was hurt by rising interest rates, which changed investors' risk/reward calculations and the discounted future value of its earnings. More importantly, several of the company's core businesses have weakened.
In the fourth quarter, Nvidia's revenue fell 21% year over year to $6.05 billion because of softness in the gaming segment, where it sells its RTX line of PC and laptop GPUs. According to The Wall Street Journal, customers' shopping decisions depend on their spending power. And with inflation draining pocketbooks, consumers are more likely to avoid big-ticket discretionary items. The recent drop in cryptocurrency prices also adds to the pain because cryptocurrency miners rely on the computational power of GPUs to mint new coins and keep their networks running.
AI could help power the next leg of growth
The beautiful thing about Nvidia is that its products have use cases in a wide variety of industries, so its revenue streams are highly diversified. Among the company's core segments, data center (which rose 11% year over year to $3.62 billion in the fourth quarter of fiscal 2023, ended Jan. 29) and automotive (up 135% to $294 million) helped defray the weakness in gaming.
Image source: Getty Images.
Enterprise customers can be less price-sensitive than individual consumers, especially considering that Nvidia's services can help them make and save money by storing and analyzing their operational data. The artificial intelligence (AI) industry could unlock the next leg of long-term growth.
OpenAI used 10,000 Nvidia CPUs to train the model for its generative AI chatbot, ChatGPT. And the market research company TrendForce believes this could eventually scale up to 30,000 as the platform becomes more complex. Because Nvidia's most advanced enterprise-level chips, such as the A100, can cost as much as $12,500, this has the potential to become a major growth driver -- especially as more companies rush to bring their own AI platforms to market.
Is it already too late to buy?
After its substantial rally in 2023, Nvidia's stock is not cheap. With a market cap of $566 million, it boasts a forward price-to-earnings (P/E) multiple of 53, which is more than double the Nasdaq average. That said, Nvidia's premium valuation looks justified. Challenges like inflation and cryptocurrency industry weakness may be temporary, while generative AI can help power the next leg of expansion.
It's not too late to buy.
