Technology crackdown

Nvidia is involved in many of the industries and technological trends that could shape the future. Its work in artificial intelligence (AI) and computer graphics are driving innovation in healthcare, transportation and even the metaverse.

So why is the stock plummeting? The US government’s crackdown on chip exports to China is behind yesterday’s plunge.

In an SEC filing on Wednesday evening, Nvidia said that it had been told to stop exporting two top computing chips used for AI and supercomputing work to China in an SEC filing on Wednesday evening. Tensions are bubbling between China and the US over Taiwan. Technology has become a focus in these escalations and the US has decided to block the sales of some AI chips to China. The US government fears that these chips could be used by the Chinese military to develop new technologies.

These geopolitical trade tensions will impact Nvidia and some of its competitors. While it’s impossible to predict the long-term effect, Nvidia predicts that there will be a $400m impact for this quarter alone.

Nvidia has growth opportunities beyond AI, but there’s no doubt that this is an important part of the business. The technology is still likely in its infancy and any breakthroughs could create lasting competitive advantages. That’s why the US government is treating the exporting of chips as a matter of national security.

Nvidia stock: bull vs bear

Given the $400m impact in this quarter alone, it’s easy to make a bear case so that’s where I’ll start. Not only has this crackdown sparked uncertainty, the macroeconomic conditions could create even more volatility. The company is battling inflation and facing a possible economic slowdown, which could weaken demand for chips.

The current valuation is dependent on future growth and it does not look like a bargain to me. Nvidia stock is valued at a price-to-earnings (P/E) ratio approaching 40 and a forward P/E of nearly 45.

This valuation is expensive yet probably reasonable. It is involved in exciting industries with immense growth opportunities. However, the last 12 months have been incredibly volatile for growth stocks in all sectors and markets. Huge swings in share prices could continue for a while yet.

However, it’s not all doom and gloom. From self-driving cars and supercomputers to transforming work and gaming in the metaverse, the long-term outlook of the semiconductor industry has a lot of promise.

I’m not rushing to buy Nvidia stock today as the news is still to develop and settle in. However, after losing half of its market value in less than a year, I see an opportunity to generate strong returns over the long term.

To reiterate, the next few months and even years could be bumpy, but over a 10-year period, strong businesses like Nvidia should be able to ride out the current economic and geopolitical storms.

Recent updates

Despite the faltering Nvidia share price, the company’s results have remained robust. For example, in the first quarter trading update, it reported record revenues of $8.29bn, up 46% year-on-year. This included record revenue from the data centre of $3.75bn, up 83% year-on-year. 

On a non-GAAP basis, which excludes the termination charge resulting from the company’s failed acquisition of Arm Holdings, net income was able to soar to $3.4bn, up 49% year on year. This has enabled the group to return $2.1bn to shareholders, through share repurchases and cash dividends. On May 23, 2022, the board of directors extended the company’s share repurchase programme to a total of $15bn. 

However, the group expects a revenue hit of around $500m in the second quarter of the year, resulting from the war in Ukraine and the lockdowns within China. This is also likely to see profits decline slightly. However, even with this revenue hit of $500m, the group still expects revenues of $8.1bn, which would be 25% higher than last year. 

Other factors

Another worry I hold about this growth stock is its involvement in cryptocurrencies. Indeed, this year the company was fined $5.5m by the SEC for covering up how crypto had boosted its revenues and was a major source of growth. However, amid the recent decline in cryptocurrencies, Nvidia recently stated that crypto revenues are now “nominal”. This may be a factor to stunt growth. 

However, there are plenty of other signs that Nvidia is set to continue its rapid growth. Firstly, in the Q1 trading update, the founder and CEO of the company, Jensen Huang, stated “we are gearing up for the largest wave of new products in our history with new GPU, CPU, DPU and robotics processors ramping in the second half”. He also pointed to its use within AI, self-driving cars, and robotics. 

According to research firm McKinsey, the global market for semiconductors could grow from $400bn to $1trn by 2030, thanks to factors such as the Metaverse. Therefore, Nvidia shares could be a great way for me to profit from this trend. 

What am I doing with this growth stock?

I recently bought some Nvidia shares, as I believe it may have hit its bottom. For one, the company is currently trading at a price-to-earnings ratio of just over 30, far lower than previous P/E ratios of around 80 during the pandemic. At the same time, the company is reporting gross margins of around 67%, far higher than most other growth stocks. This highlights Nvidia’s excellent quality and is a reason I believe it will be able to overcome macroeconomic uncertainties. Therefore, I will continue to buy Nvidia shares at this price, as I believe they could have hit their bottom. 

I don’t know when growth stocks will stage a recovery. But I’m certain that at some stage in the not-too-distant future they will. That’s because growth industries such as cloud computing, semiconductors, and artificial intelligence (AI) are set to get much bigger in the years ahead. With that in mind, here’s a look at two ‘monster’ growth stocks I’d buy for my portfolio before the market rebounds.

A global giant

One stock I see as a bit of a ‘no-brainer’ buy is Alphabet (NASDAQ: GOOG), the owner of Google and YouTube. After a big fall this year, it can be snapped up on a price-to-earnings (P/E) ratio of under 20. This is an attractive valuation, in my view, given the company’s dominance.

Alphabet is already a monster of a company (its market cap is $1.4trn). But in the years ahead I expect it to grow substantially. One growth driver is likely to be YouTube, one of the most popular content platforms on the planet. Today, it’s the second-most visited website globally. The most visited, by the way, is Google.

Other key growth drivers for Alphabet include cloud computing (where revenues are rising by around 40% per year) and AI. Over the next decade, we can expect to see its AI technology applied across a wide range of industries including healthcare, robotics, and transportation.

The main risk here, to my mind, is that in the short term, advertising revenues could be weaker than anticipated due to economic conditions. This could put pressure on the share price temporarily.

Taking a long-term view, however, I’m very bullish on Alphabet.

Powering the metaverse

Another growth stock I’d snap up while the market is down is Nvidia (NASDAQ: NVDA). It’s a leading designer of high-power computing hardware (graphics processing units, or GPUs).

Nvidia has grown at an incredible rate in recent years (five-year revenue growth of nearly 300%). And I expect it to continue generating strong growth in the years ahead. That’s because its products have become crucial to a number of high-growth industries including video gaming, cloud computing, data centres, AI, and autonomous driving.

It’s worth noting that the metaverse could be a major driver here. For this exciting new immersive virtual world to become a reality, we’re going to need a lot of high-powered GPUs for 3D graphics. This means the company could potentially be a key ‘enabler’ of this powerful new tech platform. I’ll point out that Nvidia is planning its own version of the metaverse – the Omniverse. This appears to have a lot of growth potential.

It’s a very volatile stock that’s prone to massive price swings, which is an issue. I have a high tolerance for risk, however, so I’m comfortable with the volatility here.

The stock is currently trading on a P/E ratio of about 27, which I think is great value, given the high level of growth.

Established chipmaker

Nvidia (NASDAQ: NVDA) has excelled in the past few years, rising 350% in the past five. However, due to macroeconomic concerns, the Nvidia share price has sunk 40% in the past six months and around 8% in the past year. There are equally some worrying signs for the firm. For instance, in Q2, the company expects a $500m reduction of revenues, due to the Russia invasion of Ukraine and Chinese lockdowns. But I see these as short-term issues. 

Indeed, the firm is still reporting excellent financials, with Q1 revenues up 46% year-on-year to $8.29bn. Further, with Q1 operating profit margins of over 40%, Nvidia has one of the largest margins among all growth stocks. This has also enabled the group to launch a share repurchase programme of $15bn until December 2023, which should boost metrics like earnings per share. Therefore, Nvidia shares are a no-brainer buy for me. 

More resilient growth stock 

It is rare to find growth stocks that are raising guidance in the current macroeconomic environment. However, Salesforce (NYSE: CRM), a cloud-based software and consumer relationship management company, recently increased its adjusted profit forecasts for 2022 to $4.75 per share, up from previous forecasts of $4.63. This has been driven by expanding operating margins, highlighting that the firm has dealt with inflationary pressures excellently. 

There are still risks for the firm, however. For instance, some analysts have pointed to the potential for companies to cut costs to cope with inflation, and this could include cancelling subscriptions with Salesforce. However, with a price-to-earnings ratio of around 35, which is historically cheap for the group, I am still tempted to add more Salesforce shares to my portfolio. 

Global e-commerce giant 

Sea Ltd (NYSE: SE) is the final growth stock I would buy on the dip. After sinking over 70% in the past year, this is the heaviest faller out of the three. With the group continuing to post very large losses – including a total adjusted EBITDA loss of $593.6m in 2021 – it is not hard to see why. However, this loss has been recorded due to the firm’s heavy investment into its e-commerce sector. 

This investment has led to soaring revenues. For example, in 2021, revenues for the group reached $10bn, which was a 127.5% increase year-on-year. This growth has also continued into 2022, with Q1 revenues up over 60% year-on-year. Although this signals slightly slower growth, it is still far higher than other growth stocks. After the recent dip, Sea Ltd also has a forward price-to-sales ratio of under 3, compared to over 30 at the start of 2021. This indicates that the e-commerce company has dipped too far. Therefore, I am adding more Sea Ltd shares to my portfolio. 

Recent trends in the Nvidia share price 

The share price has performed excellently over the past few years. Indeed, over the past five, it has risen nearly 400%, mainly due to the company seeing consistent revenue and profit growth. In the past year, the stock has also managed to rise 8%, meaning that it has continued to outperform the Nasdaq index. But the past six months have been far less pretty, with the technology firm losing half of its value. I feel this has created a great time to buy on the dip. 

For one, the company’s recent trading update showed significant strength. Revenues were able to climb 46% year-on-year, reaching $8.29bn. Excluding the acquisition termination charge resulting from the company’s failed acquisition of Arm, net income also climbed 49% year-on-year to $3.4bn. 

It was also revealed that the business is preparing for the release of multiple new products, which are expected to “greatly advance AI, graphics, Omniverse, self-driving cars and robotics”. As these technological advancements remain in their infancy, Nvidia is likely to have a major role to play in the future. This is great news for the company’s long-term prospects.

My concerns 

Like many other growth stocks, there are several issues facing Nvidia right now. For example, its guidance for the next quarter was significantly poorer than many expected, and revenue was expected to decline to around $8.1bn. This was due to estimated reductions of around $500m related to the invasion by Russia of Ukraine and lockdowns within China. However, I believe that these are short-term worries. 

What am I doing with this growth stock now? 

Although I’ve always appreciated the quality of Nvidia, I haven’t bought due to its high valuation. However, after its recent dip, it looks far more attractive. Indeed, based on its recent results, it has a price-to-earnings ratio of just over 30. For a company growing at the same rate as Nvidia, with such high profit margins, this doesn’t seem too high to me. 

The company has also recently extended its share repurchase programme, allowing it to buy back up to $15bn of its shares through to December 2023. This demonstrates management belief that the Nvidia share price is overly cheap. It should also help boost metrics such as earnings per share, which would make the firm even more attractively valued. 

Therefore, after its recent dip, I think now is a great time to buy Nvidia. I may add some to my own portfolio over the next few weeks. 

With that in mind, let’s take a look at one such business I think could be an excellent addition to my portfolio today.

A growth stock fallen from grace?

Nvidia (NASDAQ:NVDA) is one of the largest semiconductor growth stocks in the world. It specialises in designing high-performance graphics chips called GPUs, used by gamers, visualisation professionals, and data centres.

To keep operations flexible, chip manufacturing is handed to third-party experts such as TSMC and Samsung. However, while this does allow the firm to focus its resources on technical innovation, it’s created a few issues in recent years.

The supply chain disruptions caused by the pandemic have resulted in a semiconductor shortage. And when combined with inflation, the cost of manufacturing and distribution has increased significantly.

So it’s not surprising to see investors panic, slashing the share price in half over the last six months. The stock is still up by around 20% from a one-year perspective. But it begs the question, is this fall justified? Or is this just another growth stock to get caught in the sell-off crossfire?

Taking a closer look

Supply chain disruptions, rising manufacturing costs, and logistical nightmares are understandable reasons to sell shares in a business. But it seems investors may have jumped the gun when it comes to Nvidia. Why? Because revenue and profits are at an all-time high.

Total sales for the last 12 months came in 53% higher than a year ago, at $26.9bn. And with management flexing its pricing power, gross margins actually increased even with rising costs! As such, net income landed at $9.7bn – a 125% surge versus a year ago.

With all its divisions (excluding a tiny robotics segment) outperforming analyst expectations, along with guidance indicating current top-line growth and margin expansion will continue, this stock looks like it’s perfectly positioned to thrive throughout 2022 and beyond.

Time to buy?

Sadly, nothing is risk-free. Even an industry titan like Nvidia has its weaknesses. And my main concern continues to surround manufacturing. With demand for semiconductors continuing to skyrocket, courtesy of the automotive industry, getting its GPUs into customers’ hands could prove challenging.

What’s more, if the quality of the chips that do make it to customers turn out to be of poorer quality due to a rushed manufacturing process, it could cause severe damage to Nvidia’s reputation, opening opportunities for its competitors.

Having said that, I personally believe the recent collapse in its stock price has created an immense buying opportunity. That’s why I’m tempted to snatch up some shares for my portfolio while the price remains, in my opinion, cheap.

One obvious way to get exposure to the metaverse, as an investor, is through buying shares in Meta Platforms, the company formerly known as Facebook. It’s currently spending around $10bn per year to build its metaverse. However, there are plenty of other stocks that offer exposure to this exciting growth story. Here’s a look at three I’d be happy to buy today.

Microsoft

One of my top stock picks for metaverse exposure is Big Tech giant Microsoft (NASDAQ: MSFT). As a major player in both video gaming and collaboration software, I expect it to be at the forefront of the metaverse revolution in the years ahead.

In terms of its plans for the metaverse, Microsoft CEO Satya Nadella has said that the group is currently creating an entirely new platform designed to bring people, places, and things together with the digital world. This will have applications in both the consumer space and the enterprise space. An important development here is its new Mesh product. This is a collaborative platform for virtual experiences that can be accessed from any device.

The risk here is that MSFT is likely to face plenty of competition from Meta Platforms in the years ahead. So, there’s no guarantee it will be a winner in the metaverse. I’m comfortable with this risk though, as Microsoft is a diversified company with exposure to a number of other high-growth industries.

Overall, I think it’s a great stock for me to own for the long term.

Nvidia

Another top metaverse stock, in my view, is Nvidia (NASDAQ: NVDA). It designs high-power computing chips that are used to power video gaming and artificial intelligence applications. Given the strength of its chips, I think Nvidia is likely to be a key ‘enabler’ of the metaverse.

Last year, Nvidia announced that it had developed its own metaverse-type platform, the ‘Omniverse’. This is an advanced technology platform that brings together the group’s expertise in AI simulation and graphics, and can be used to create virtual avatar characters, interpret speech, and create new 3D worlds. This platform appears to have a lot of potential.

Nvidia is an expensive stock that’s highly volatile. So, it’s not one for those seeking capital preservation. I’m willing to tolerate short-term share price swings, however. I think the long-term growth potential here is significant.

Roblox

Finally, I like Roblox (NYSE: RBLX) as a more speculative play on the metaverse. It’s a video gaming company with a platform that enables users to come together to play, learn, communicate, explore, and expand their friendships online. With over 50m daily users, you could say that Roblox has already created its own metaverse.

Roblox stock has underperformed recently, however, the company continues to grow at a rapid rate. Last year, for example, revenue increased 108% year on year to $1.9bn. Given the popularity of video gaming globally, I see plenty of growth ahead. This year, analysts expect revenue of around $2.9bn.

I’ll point out that Roblox is not a stock I’d load up on. The company isn’t yet profitable, so it’s a high-risk investment. I do see plenty of growth potential though. So, I’d be willing to take a small position here.

Nvidia’s background

First, let’s take a look at what it actually does. It’s the world’s leading designer of graphics processing units (GPUs). While this might sound complicated, GPUs are essentially devices that help handle intense graphics and rendering. They therefore have essential uses in sectors like gaming, systems, artificial intelligence, even the automotive industry.

Even more exciting, Nvidia broke these sectors down in a recent investors day presentation, in which it estimated its total addressable market to be north of $1trn. This came from $100bn for gaming, $300bn for chips and systems, $150bn for AI, $150bn for Omniverse software, and $200bn within automotive. Nvidia having broad access to all of these high growth markets really does excite me and gives me confidence in the company’s growth story.

 In addition to this, the 2022 Q4 results were also great. It delivered record quarterly revenues of $7.6bn, up 53% from the same period in the previous year. The 2022 financial year’s revenue also rose an astounding 61% compared to FY21. And earnings per share climbed over 103% year-on-year, reaching $1.18. If the firm can keep delivering results such as these, I expect the share price to keep climbing.

Nvidia share price risks

The primary risk I see for the share price is how rising interest rates could affect high-growth stocks. Inflation has been soaring across the globe and to combat this, central banks are hiking interest rates. When rates go up, people pull their money out of higher-risk assets and put it into safer ones. High growth stocks like Nvidia are usually hit hardest as a consequence.

In addition to this, it currently trades on a price-to-earnings (P/E) ratio of 71. Although the tech industry operates with notoriously high multiples, this is light years above anything that I would consider good value. That being said, we have seen stocks like Tesla trade on monster P/E ratios and still deliver high growth.

The verdict

Overall, I think the outlook for Nvidia is bright. It has delivered stellar results and has a stake in a some of the fastest growing markets on the planet. Perhaps if I was less risk averse this alone would be enough for me to add the shares to my portfolio. However, the sky-high multiple and rising interest rate situations do worry me. As such, I’ll be keeping the stock on my watchlist for the time being.

Background

Nvidia is the leading designer of graphics processing units (GPUs). Its primary markets are gaming computers, data centres, and car entertainment systems. The company’s dominant position in markets that are growing rapidly has pushed revenues and profits higher. As a result, the Nvidia share price has gone the same way.

Intel, by contrast, has been having a difficult time lately. Despite having a bigger research and development budget, the business has struggled to innovate. As a result, it has fallen behind its rival Advanced Micro Devices in terms of design capacity. This has led to the company losing market share and the Intel share price has struggled accordingly.

The technological gap to AMD is reportedly huge. So in order to try and right the ship, Intel CEO Pat Gelsinger is attempting to pivot the company towards manufacturing. The shift is a risky one, involving substantial capital investment. But it’s the centrepiece of the Intel plan to stay relevant in the semiconductor boom.

Nvidia and Intel

The idea that Nvidia might be open to using Intel’s manufacturing facilities (known as foundries) is significant for both companies. For Nvidia, having Intel produce its chips would allow it to diversify its manufacturing base. Adding Intel to its foundry list would decrease its reliance on Taiwan Semiconductor Manufacturing and would also give it the capacity to manufacture chips in the US.

For Intel, the news that Nvidia might be willing to use their facilities goes some way towards justifying the company’s move to investing huge amounts in manufacturing facilities. Intel is involved in designing chips as well as manufacturing. An immediate concern is whether rival chip designers would be willing to use Intel’s facilities for fear of giving away their trade secrets. Yesterday’s announcement goes some way towards assuaging these concerns.

Conclusion

For me, investing in either stock involves too much risk. I think that the Nvidia share price is very high at the moment. While I view the company as impressive, I’m not convinced that it can grow its earnings fast enough to justify an investment at these levels. With Intel, the opposite is true. The Intel share price seems low. But the issue there is that I’m not sure that the company can grow its earnings at all. Intel has a lot of capital expenditure ahead of it and the question of whether or not it will pay off seems uncertain to me. As a result, I’d prefer to take a much lower-risk strategy in buying into semiconductor stocks. 

With this in mind, here are the stocks I’m buying before next month.

A Stocks and Shares ISA investment

I’d first top up my investment in Nvidia (NASDAQ: NVDA), the leading designer of computer graphics cards. Like most share prices, the stock has come under pressure recently and is down by 10% so far this year. I think this may represent a buying opportunity. Analysts seem to think so, too, as the consensus share price target is $338, or 27.5% above today’s share price.

Nvidia benefits from being the leader in computer graphics card design. In fact, the company invented the graphics processing unit (GPU) that is now a crucial component in various high-end computers.

GPUs are also required in advanced technology such as artificial intelligence and autonomous driving. I see these technological trends as being huge catalysts for Nvidia’s growth in the years ahead. As a long-term investor, this does get me excited about buying Nvidia’s shares.

It hasn’t been all good for the company recently though. It failed in its attempt to buy Arm from SoftBank. This was a big disappointment, in my view, as Arm is a leading chip designer focusing on central processing units, or CPUs. It would have diversified Nvidia’s business, and potentially led to quicker growth for the company.

Nevertheless, I’d add Nvidia shares to my portfolio today.

One more stock I’d buy

I’d also buy the home repair services group Homeserve (LSE: HSV). It owns the platform Checkatrade, which I think strengthens the business as it’s a trusted place to find tradespeople in the UK.

The share price has been almost in freefall recently though. This year alone the price has dropped 21%. And over one year, the stock is down a huge 41%. It means the shares are valued on a lowly price-to-earnings ratio of 12 based on next year’s earnings forecast. I think there could be some good value here.

Financial performance looks to be improving, too. Revenue is expected to rise by 8% in fiscal year 2023 (the 12 months to 31 March 2023). Net profit is expected to rise by an even bigger 13%, which suggests that margins are improving.

The investment isn’t without risk. Homeserve is undergoing a transformation plan of its UK business as it tries to return it to growth. It’s a key risk to consider because the UK is Homeserve’s most established market.

But for me, I think the risks are full priced into the shares. So I’d buy the company in my Stocks and Shares ISA before the deadline next month.