It's hard to time the market. But with inflation falling and the Federal Reserve possibly near the end of its rate-hike cycle, now could be a great time to bet on a rebound. Up a whopping 92% in 2023, shares of Nvidia (NVDA 5.80%) have already started surging. But the bull market could be just getting started for this innovative tech leader.
What went wrong for Nvidia?
Nvidia specializes in graphics processing units (GPUs), a type of hardware used to run advanced computer processes such as gaming visuals and cryptocurrency mining. Historically, this niche has enjoyed booming growth. But it has made Nvidia's revenue highly cyclical. When the economy is strong, gamers are more likely to upgrade their rigs with top-of-the-line chips to maximize performance. But when money is tight, they tend to put off these nonessential purchases.
Likewise, in the cryptocurrency market, mining activity usually follows the boom-bust cycle in cryptocurrency prices. And after the second-largest cryptocurrency, Ethereum (ETH -1.20%), moved to a proof-of-stake consensus mechanism (where mining is no longer required to mint new coins), a substantial driver of GPU demand is now gone.
The good news is that down cycles eventually reverse. And Nvidia is on track to become less vulnerable to this type of volatility as more-stable business segments begin representing a larger share of its revenue.
1. A rapidly diversifying business model
In the fiscal fourth quarter, revenue fell 21% to $6.05 billion, mainly because of the challenges in the gaming segment mentioned earlier. But other, less cyclical businesses are growing to represent a larger share of its operations.
For example, data center revenue jumped 11% to $3.62 billion (almost 70% of all sales), while its automotive business is also on track to become another big growth driver as self-driving car technology matures.
Image source: Getty Images.
But Nvidia's greatest opportunity to diversify outside of gaming lies in generative Ai, a computer-assisted creativity technology that burst into the mainstream with the release of OpenAI's chatbot, ChatGPT.
Ai platforms rely on a huge amount of computational power, with ChatGPT itself using 10,000 of Nvidia's A100 GPU chips to train its model. These products can retail for around $10,000 per unit, so this could become a massive revenue opportunity for Nvidia as ChatGPT and other similar generative AI programs become more popular.
The technology has uses in many industries, including software coding and customer service, so it will add a nice layer of diversification to Nvidia's business.
2. It's not too late to buy
While Nvidia shares are down almost 20% from an all-time high of $333, reached in late 2021, the stock isn't cheap from a valuation standpoint. With a forward price-to-earnings (P/E) multiple of 61, it trades for roughly three times the S&P 500's average.
That said, companies are more than just their near-term profits. Nvidia has other selling points, such as its strong economic moat as a leader in a very advanced industry. And this helps justify the price tag.
Furthermore, the company's tremendous opportunity in AI can help power growth and diversification for decades to come. Shares still look like a buy.
