These shares haven’t been this cheap in over a year, and overseas investing expert Rodney Hobson thinks there might be an opportunity here.
Technology stocks have been out of favour, causing the Nasdaq technology index to slide into bear territory this year. However, investors have been over keen to treat all tech companies with equal disdain. Some are doing well despite difficult circumstances. One worth considering is graphics processing designer NVIDIA Corp (NASDAQ:NVDA).
Nvidia is best known for its gaming graphics and there is no evidence that the pandemic or the cost-of-living crisis are deterring addicts. Even so, it is not resting on its reputation as the top designer of graphics processing units and has expanded into data centres and car entertainment systems, where there is further scope for profitable expansion.
The move from simple to complex graphics has kept Nvidia ahead of the competition, although it was the traditional gaming side that was mainly responsible for a record rise in revenue in its first quarter compared with a year earlier. For the three months to 1 May, total revenue rose 46% to $8.3 billion.
Net income actually slipped 15% to $1.62 billion. However, that was entirely down to a $1.35 billion charge against the proposed acquisition of rival chipmaker ARM that was blocked by regulators. Net income is set to rise strongly after that one-off imposition despite the adverse impact of the Russian invasion of Ukraine, intermittent Covid-19 lockdowns in China and the continuing trade tensions between the US and China.
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Management forecasts that revenue will remain stable or possibly slip slightly in the second quarter, taking into account a loss of $500 million from the Russian invasion and lockdowns in China. Given the stellar rise recorded in the previous quarter, this guidance is likely to be tilted towards the pessimistic side.
Data centre semiconductors should continue to deliver record results and prove to be the biggest driver of growth in the near and medium future. Tin addition, the company’s largest wave so far of new products will provide a further boost. Artificial intelligence, another area where Nvidia has an edge, will inevitably take off. Self-driving cars, robotics and the metaverse await.
Nvidia's Omniverse platform, which enables the development of real-time 3D simulations, is particularly exciting. Many big companies, including Amazon (NASDAQ:AMZN), are already using it.
Meanwhile, a collaboration with carmaker Mercedes-Benz Group AG (XETRA:MBG) will consolidate Nvidia’s strong presence in vehicle electronics, especially in the development of driverless vehicles.
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Nvidia is a clear leader in several fields, which makes its position difficult for rivals to challenge. It already has a 90% market share in gaming graphics but it is starting to dominate the newer field of artificial intelligence as well.
The shares rocketed from $40 three years ago to more than eight times that at $330 last November. They are now down to around half their peak at a more realistic $160.
Source: interactive investor. Past performance is not a guide to future performance.
They are still not obviously cheap, trading at a demanding price/earnings ratio of 43 and offering a yield of only 0.1%, but they could well be establishing a floor at the current level. A stepping up of share buybacks to $15 billion, financed by impressive free cash flow, should help. Nvidia spent $2.1 billion on share buybacks and dividends in the first quarter.
Hobson’s choice: It may be a little premature but Nvidia is looking increasingly like a buy. It is a solid, profitable company with products that will remain in demand, and it has the right attitude of looking for new markets and improvements to its technology. More cautious investors may prefer to hold off to see if the shares slip further, with a really solid floor looming at $124, but such an attitude could mean missing the current opportunity if, as is likely, the shares bounce back.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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