New technologies come with lots of excitement about their potential, but as enthusiasm ebbs and flows, share prices often move three-steps-forward and two-steps-back.
The current selloff is testing the patience of investors who have long term faith in companies like Nvidia Corp, (NDQ: NVDA) a leader in the graphic processor units used in video games. The shares split 4-for-1 in July and split-adjusted are down 58% year-to-date at the time of writing. That compares with the Nasdaq Composite Index which is down 32% per cent year-to-date.
Background: While Nvidia is best known for the GPUs used in gaming systems, it is also a leader in the chips used in artificial intelligence (AI) and cloud-based computing. These chips run autonomous robots, self-driving cars and drones. A growing area is the processors used by crypto-currency miners.
Recent developments: Nvidia’s second quarter earnings missed expectations for revenue and earnings with growth slowing significantly. The main culprit was lower sales of its graphics cards used for gaming in PCs and gaming consoles.
Revenue of US $6.7 billion was 21% lower than the consensus estimate, with earnings per share 60% lower at $0.51 on an adjusted basis.
Its data center business did far better, rising 61% on an annual basis driven by demand for chips used in AI and other intensive applications. Facebook’s parent Meta, for one, uses Nvidia chips for AI research.
The unknown is the impact of the cryptocurrency crash on Nvidia. Cryptocurrency mining uses Nvidia’s chips to add transactions to a blockchain as part of a process that allows the transactions to be transparent.
Nvidia doesn’t know how much mining affects demand for its products, though it admits the collapse of some cryptocurrencies has had an impact.
Sales to auto companies could take up some slack. In March, Nvidia announced a partnership with Chinese conglomerate BYD, the world’s second-largest electric vehicle maker, to develop chips for its cars.
Dividend: Nvidia pays a $0.16 annual payment which yields 0.12% at current prices.
Discussion & Outlook: Nvidia benefitted from stay-at-home trends in 2020 and 2021 which led to a surge in demand for gaming and spending on PCs, consoles and gaming hardware. It pulled demand forward and so as discretionary spending has gone elsewhere with reopening sales are down.
As Nvidia diversifies into AI and automotive applications it is also spending $7 billion a year on R&D. This is a hidden asset that generates new products. It is also dominant in its segment, so while conditions are weak it will be the first to recover.
It has US $17 billion in cash and US$9.7 billion in long-term debt which is a modest 2.7% of its market capitalization.