Beleaguered American chip designer NVIDIA has seen its share price drop more than 50% in 2022.
And yet, this hasn’t deterred former Facebook investor Jim Breyer from declaring that the company represents a “deeply compelling three-year bet.”
But what is it that the famed venture capitalist sees in the company? And is he right to be this optimistic on a stock that’s faced so many obstacles in the past?
Weak Margins And Falling Profits
From a company-wide perspective, NVIDIA’s latest financial report drew a pretty bleak picture of the business overall.
To begin with, while the firm’s revenue of $6.7 billion did increase 3% year-on-year, it also fell sequentially by 19%. This undoubtedly helped crush NVDA’s net income, which declined 80% annually from the $2.37 billion it made in FY 2022 to the $656 million it generated this time round.
Moreover, NVIDIA’s margins tanked during the quarter, with its net profit margin dropping from 36.5% to 9.6% over the last twelve months. Gross margins weren’t much better either, falling 20.8 percentage points to 45.3%.
Interestingly, the company’s operating expenses also spiked throughout the period, coming in at $2.37 billion, a massive 72.1% increase year-on-year. These costs represent a significant 78.1% slice of its gross earnings for the period, and 35.4% of its entire sales.
A Trade War Amid Declining Demand
NVIDIA’s poor second quarter is just the culmination of all the other headwinds it’s facing right now.
In fact, one of the most pressing concerns for the company is the ongoing political fallout between the U.S. and China. The heightened animosity between the two countries has resulted in several domestic legislative developments, the most important of which is the passing of the CHIPS Act.
Indeed, the bill has been seen as a double-edged sword for American semiconductor businesses, and could be especially bad for “fabless” chip manufacturers like NVDA that outsource production and buy materials from other jurisdictions such as China.
Adding further to its problems, NVIDIA’s Gaming and Professional Visualization revenue is projected to fall sequentially in the third quarter, while total sales are not expected to exceed $5.90 billion for the business as a whole. Its OEM and channel partners are already ramping down inventory levels as demand for its PC-related products continues to decline.
NVIDIA’s Quantum Revolution
If the near-term outlook seems so poor for NVDA, why is Jim Breyer still so bullish for the company in the long run?
Well, to begin with, NVIDIA enjoys a technological moat that is, in Breyer’s mind, simply unimpeachable. For example, the company has such a large lead over its rivals in the graphics processing unit (GPU) market that it’s almost impossible for competitors to catch up.
On top of that, its dominance in the high-end GPU space allows it to charge premium prices, which in turn should help repair its dwindling bottom line.
Furthermore, NVIDIA has aggressively invested in Artificial Intelligence (AI) technology, which is likely to be a major growth driver for the company.
Indeed, armed with powerful AI machine learning algorithms and a host of artificial neural networks, programmers are now testing ideas with NVIDIA’s hardware architecture that were once thought of as belonging to the realm of science fiction.
Moreover, the advent of quantum computing will assist in accelerating this revolution too.
In fact, quantum computing and artificial intelligence seem almost made for one another, as they both require large amounts of data storage and processing power to function.
And this makes them the perfect pairing: quantum computers can handle massive amounts of data, while artificial intelligence can sift through the resulting datasets, identify patterns, and improve performance over time. Together, these two technologies have the potential to solve some of the world’s most complex problems.
However, at present, researchers need a bridging technology to enable them to build dynamic quantum workflows across various computing systems.
Fortunately, this is NVIDIA’s forte, and the company has engineered a product to cater precisely to this need called QODA – or Quantum-Optimized Device Architecture.
It also happens to be the case that QODA is the first of its kind to integrate GPUs, CPUs, and emulated QPUs for hybrid quantum-classical computers.
Although NVDA isn’t likely to build its own quantum computer just yet, the company is positioning itself as the go-to supplier for those developers who will.
And that’s why Jim Breyer is so convinced of NVIDIA’s weighty potential. In fact, its role as the provider of hardware and cutting-edge technology for the nascent quantum computing industry might be more profitable than if the firm sought to innovate its own particular offering.
Should You Follow Jim Breyer’s Lead?
If Breyer is correct in his assessment of NVDA, the question for investors now is whether to start building a position in the company today or hold out for a better entry point later on.
The first thing to note about Nvidia’s price action is that, despite losing more than half its value this year, the firm still trades at 42x its forward earnings. The company has been able to demand a high premium for its shares recently – especially since analysts had been bullish on the stock – but Wall Street optimism in the company has diminished, and NVDA’s depressed outlook for the upcoming quarter isn’t doing much to change that view.
However, the business still has some excellent segments, and its present problems are not going to last forever. For instance, NVIDIA’s Data Center operation is up 61% year-on-year, while its Automotive revenues also increased 45%.
Finally, NVIDIA shares haven’t been this low since mid-2021, although the stock has been falling continuously since last November. No matter, if you take Breyer’s multi-year view of the company, that just gives you the opportunity to dollar-cost average over the intervening period. But, if he’s right, and NVIDIA comes back stronger, the potential gains could be equally big.
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