The Nasdaq and S&P 500 indexes both dipped into correction territory recently, meaning they fell more than 10% from their recent highs. They have recovered a bit, but the Fear and Greed index still shows the markets are fearful. Reasons include the shaky economy (despite impressive GDP growth last quarter) and the fraught geopolitical landscape.
People get spooked when the market falls. It's natural; none of us want to lose our hard-earned money. Our emotions say "stay away" since we are inclined to avoid danger. But intellectually, we understand the way to create long-term market-beating gains is to buy stocks of quality companies when others are pessimistic, and be patient. This doesn't mean we have to invest in just about any stock that is down. With a possible recession ahead, geopolitical risks, and high interest rates, I'm looking for companies in secular growth industries experiencing growing demand and soaring profits.
Few, if any, fit the mold better than Nvidia (NVDA -0.29%), and it looks like a great place to invest extra cash, be it $1,000 or another amount that makes sense to you.
What is happening to Nvidia stock?
Red-hot Nvidia's stock fell 18% from its recent high before regaining some ground. There are a couple of reasons behind this price action. First, the stock has seen a prolific rise (almost 200% this year), so its highly likely investors are taking profits while the market struggles to find its footing.
In addition, the United States imposed more restrictions on selling advanced AI chips to China. For Nvidia, Chinese sales amounted to 20% of revenue last quarter, however these restrictions don't mean that Nvidia will lose 20% of its total sales. The restrictions apply only to specific chips, and Nvidia can still sell less powerful chips and design other chips that comply with regulations. The chipmaker, in fact, clarified that the restrictions won't have a meaningful impact on near-term results.
However, a combination of these reasons was sufficient to whipsaw the stock, given the general tepidness in the stock market in the second half of this year.
Yet, the market realizes that there's tremendous worldwide demand for Nvidia's products, both in the short and long term, which means there's little reason to be concerned about the semiconductor giant's core business. The company literally cannot make enough to satisfy customer demands. Harkening back to Finance 101 and the laws of supply and demand, this means Nvidia has tremendous pricing power.
Let's take a look at how this meshes using the infographic below.
We can see that the hardware and software that Nvidia provides to data centers provided revenue of $10.3 billion and 75% of total sales last quarter. This was a year-over-year (YOY) sales increase of 171% for the data center stream and 71% for total revenue. Nvidia's data center solutions accelerate performance and are critical for keeping up with the demand for cloud-based applications. Artificial intelligence (AI) and machine learning (ML) programs will keep demand hot for years.
The incredible demand has done wonders for Nvidia's profits. Operating income was up over 1,000% YOY to $6.8 billion last quarter, and net income (top right of the graphic above) hit $6.2 billion. Just how impressive is the 50% operating margin? Take a look at how it compares with competitors below.
NVDA Operating Margin (Quarterly) data by YCharts.
Only Broadcom comes close, with Advanced Micro Devices and Intel far behind.
Is Nvidia stock a good buy?
Nvidia often gets labeled "overvalued" because of its current price-to-earnings (P/E) ratio over 100. But P/E is a backward-looking metric; it measures what has already happened, not what is forecast for the future. Nvidia's P/E, based on Wall Street's estimates for next year, falls to 40, then to 26 the following year, as shown below.
NVDA P/E Ratio data by YCharts.
For perspective, Microsoft has a forward-one-year P/E of 27, and Nvidia is growing at a much faster pace.
As with any high-growth stock, Nvidia could experience turbulence in the short term. However, incredible demand driven by the cloud and the rise of AI and ML make it a solid bet to enhance an investment portfolio over the long haul.
