The graphics processing units (GPUs) supplier, NVIDIA Corp. (NVDA) is currently down on its near-term outlook, which disappointed many. While the wider geopolitical and economic instability has been taking a toll on the stock this year, its long-term prospects are magnificent. It is one of those high-value growth stocks that is best to hold on to for the decades to come.
Down over 42.28% in 2022, the latest blow to the NVDA came from its yesterday’s earnings report. The company beat its Q1 fiscal 2023 earnings and revenue estimates but forecasted guidance below the expectations. Thus, the report sparked a sell-off in the stock, which led to a downfall of 6.82% in the after-hours on May 25, 2022. The stock was then trading near its lows at a price of $158.17 a share. This decline came after a rally of 5.08% in the earlier session on the day.
NVDA’s Upbeat Q1 Performance
As expected, the graphics card giant came out with upbeat Q1, 2023 results that surpassed estimates for all key areas. The company posted revenue of $8.29 billion in the quarter which was well above the estimate of $8.10 billion. The quarterly revenue grew by a nice 46% YOY and 8% sequentially with record revenue in Data Center and Gaming. The Data Center revenue was above the expected $3.63 billion at $3.75 billion while the Gaming revenue was $3.62 billion against the estimate of $3.53 billion. This record revenue in its segments came against a backdrop of the numerous challenges from the macroeconomic turmoil.
Moreover, the chip-maker had a net income of $3.44 billion in the quarter, which went up by 49% YOY and 3% sequentially. Growing at the same pace was the adjusted earnings of $1.36 a share, which beat the consensus estimate of $1.29. On the other hand, the operating income in the quarter shot up by 55% YOY and 8% sequentially to $3.95 billion.
Share repurchases and cash dividends in the quarter accumulated to a return of $2.10 billion to shareholders. This week, the company further increased and extended the share buyback plan to repurchase an additional $15 billion worth of common stock through December 2023.
Q2 Fiscal 2023 Outlook
The fast deteriorating geopolitical and economic conditions had the company post an outlook that disappointed investors. NVDA is anticipating a reduction of roughly $500 million in its Q2, revenue from the war in Ukraine and lockdowns in China due to Covid-19. Thus, the company expected the ongoing quarter’s revenue to be $8.10 billion +/-2%. Wall Street was expecting revenue of $8.44 billion for the quarter.
Non-GAAP gross margins are pegged at 67.1% +/-50 basis points, operating expenses at roughly $1.75 billion, and other expenses at $40 million approximately.
Deteriorating Market Conditions
Looming Recession
Playing a huge role in NVDA’s year-to-date decline and the bleak outlook for the ongoing quarter are many geopolitical and economic factors. The stock market is in turmoil as inflation surges and borrowing money becomes harder. The Fed is upping interest rates further to curb the rising inflation and save the economy from a recession. However, the chances of a recession are becoming more and more real by the day. According to a survey by Bloomberg, recession chances in the U.S. have increased from 15% three months ago to around 30%. Furthermore, history shows that whenever the average quarterly inflation went above 5% and unemployment below 4%, the economy faced a recession the following year. With the U.S. having crossed those metrics in Q4 2021, CEPR agrees on a recession sometime in 2022. Even if the economy withstands the pressures this year, battling rising rates would become harder in the next year.
Macro Environment
The economic macro environment is also becoming more and more challenging by the day. While the war on Ukraine is one aspect, strict lockdowns in China are another. Both have fueled a global supply chain bottleneck and slowdown of economic activities. The global semiconductor supply chain has been immensely impacted specifically due to the China shutdowns. Semiconductors, being the key to numerous industries, including computers, vehicles, healthcare, etc., have produced a huge supply and demand gap.
Equities Downfall
The overall situation has led to the downfall of equities markets with the Nasdaq squared in the bear market territory and S&P 500 near it. The S&P 500 composite recently had a brush down with the bear market as it temporarily fell over 20% last week and is now around -18%. If the geopolitical and economic instability continues, it is only plausible that the composite will hit the bear market territory like Nasdaq. Not only equities but cryptocurrency are also plunging down continuously this year.
With Every Fall Comes an Opportunity
Amid this market downfall due to the geopolitical and economic turmoil comes a good investment opportunity. Such downfalls are inevitably followed by rebounds and hence investing in worthy stocks at a beaten-down price is the best answer. At times like these, NVDA is one of the most attractive stocks that could lead to profits over a lifetime, as its long-term outlook is highly bullish.
NVIDIA Corp. (NVDA)
NVDA with the invention of GPU has revolutionized the entertainment industry with ultra-realistic visuals. GPUs are also used in complex data center workloads, like AI and scientific computing. Being the first mover, the company presently has a 90% market share in workstation graphics and supercomputer accelerators. Added to this, the company’s portfolio also includes data center networking solutions and software products. 3D graphics and AI are becoming more relevant by the day. Metaverse, virtual reality, autonomous robots, and vehicles are reshaping the world. All of these are proving substantial tailwinds for the company. The market opportunity, according to its management, is over $1 trillion.
To deal with the current situation, the company has numerous new products in line for launch this year. It also plans to slow down hiring and be more prudent with its operating budgets. While a recession could lower the demand for pricey graphics cards in the near term, its huge market opportunity, wide portfolio, industry position, and strong fundamentals, all are indicative of its future growth. Even in the short term, the company is expected to outperform its industry in terms of revenue and earnings growth, by experts. Despite what happens this year or the next, NVDA is a stock worth buying and keeping for years to come.
Conclusion
The market is in a downfall. Geopolitical and economic conditions are deteriorating, a recession is in sight and inflationary pressure is peaking. But regardless of the current or near term situation, NVDA remains a high-value stock with huge growth prospects in the longer run. The current conditions and its beaten-down price only bring a great opportunity to purchase it at a much lower price than its value. All but one of the 50 brokerages following NVDA suggests holding the stock or buying more of it.
