Stock prices have fallen sharply on fears of recession this year, causing the Nasdaq Compound sink deep into a bear market. In fact, the tech-focused index has fallen almost 36% from its peak in November, marking its biggest decline in the past decade.
Many individual stocks are in the same boat. Nvidia (NVDA 5.38%) and Microsoft (MSFT 4.33%) saw their share prices fall by 66% and 33% respectively. Neither stock has suffered a worse loss at any time in the past 10 years. But both companies are still backed by a strong investment thesis, making them a once-in-a-decade buy opportunity.
Here’s what investors need to know.
Nvidia: A Leader in Graphics and Accelerated Computing
Nvidia is shaping the future of countless industries. Its graphics processing units (GPUs) bring groundbreaking visual effects to video games and movies and bring unparalleled processing power to complex data center workloads such as analytics and artificial intelligence (AI). In fact, Nvidia currently has over 90% market share in workstation graphics and supercomputer accelerators, and Forrester Research recently said that Nvidia GPUs are synonymous with AI infrastructure.
In recent years, the company has doubled its data center business, strengthening its leadership in graphics and accelerated computing. For example, Nvidia added high-performance networking solutions to its portfolio with its acquisition of Mellanox in 2020, and the company then launched a new type of processor: the data processing unit (DPU). Nvidia DPUs accelerate data center workloads by offloading networking, storage, and security tasks from central processing units (CPUs).
Nvidia has also expanded into software. Its AI Enterprise suite helps companies build AI-powered applications in end markets such as healthcare, manufacturing and retail. Likewise, its Omniverse platform allows creators to collaborate on 3D design projects, enables developers to create intelligent digital humans, and allows researchers to train AI models for self-driving cars and other autonomous machines. .
Many investors are well aware that Nvidia posted abysmal financial results in the last quarter due to a sharp decline in gaming revenue as high inflation stifled consumer demand. But the company still delivered decent results over the past year. Revenue jumped 36% to $29.7 billion and earnings under generally accepted accounting principles (GAAP) rose 9% to $3.05 per diluted share. Moreover, the long-term investment thesis is still intact despite the short-term headwinds.
Nvidia is still the benchmark for graphics and accelerated computing, and the company stands to benefit greatly as technologies such as AI and VR (including the Metaverse) continue to evolve. In fact, management values its addressable market at $1 trillion, and with stocks trading at a reasonable 9.6 times sales, investors shouldn’t pass up this once-in-a-decade buying opportunity.
Microsoft: critical software and infrastructure
Microsoft is the foundation on which countless companies are built. Its foundational platform, Microsoft 365, is the most popular enterprise application suite of all types. It brings together a wide range of mission-critical and market-leading products, including Office 365 for productivity; Communications teams; Power BI for business analysis; and Defender, Sentinel, and Azure Active Directory for cybersecurity.
Microsoft is also gaining momentum in cloud computing. In the second quarter, Microsoft Azure held a 24% share of the cloud infrastructure market, up from 22% a year earlier. This puts Microsoft in second place behind Amazon Web Services, which bodes well for the future. According to Grand View Research, the cloud computing market is expected to grow 15.7% annually to reach $1.5 trillion.
Over the past year, Microsoft has posted another strong financial performance. Total revenue increased 18% to $198.3 billion, fueled by impressive growth in cloud services and cybersecurity, and free cash flow soared 16% to $65.2 billion of dollars. Despite inflationary headwinds, investors have reason to believe that the momentum will continue.
No company is immune to an economic downturn, but Microsoft is more resilient than most. Not only does its portfolio include a number of must-have software products and cloud services, but the company also has over $100 billion in cash and short-term investments on its balance sheet.
It’s also worth noting that Microsoft pays a quarterly dividend of $0.68 per share, which equates to a dividend yield of 1.16%. This payment has increased every year for the past 13 years, increasing at an annualized rate of 13.5%. Microsoft is on its way to becoming a dividend aristocrat, making the stock a particularly attractive option for growth investors looking for passive income. And with shares trading at a reasonable 24.3 times earnings – a bargain from the three-year average of 32.2 times earnings – now is a good time to buy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Trevor Jennewin holds positions at Amazon and Nvidia. The Motley Fool holds positions and recommends Amazon, Microsoft and Nvidia. The Motley Fool has a disclosure policy.