Recessions in the semiconductor industry hearken back to the days before computing. They’re inventory recessions. Supply exceeds demand, so production slows while supply is worked off. Once inventory comes back into balance, prices rise and supply resumes.
The latest results from Nvidia (NASDAQ:NVDA) indicate the latest chip recession, which began a year ago, is already easing. Net income of $552 million, 90 cents per share was down by half from what it was then. But revenue of $2.58 billion was up 16% from the previous quarter.
This put some wind back beneath the wings of the stock. It shot up $10 per share almost immediately. With the stock market roaring back, Nvidia opened Aug. 19 up another $5, at $164.
Smart Money Buying
But the smart money was already in. So was I. I picked up 100 shares for my retirement account in May, so after a bumpy ride (it has since been as low as $132) I’m in the money.
I have also recommended the shares twice since the start of July. First I recommended it for those who look good in leather jackets, like Nvidia CEO Jensen Huang. More recently I have counseled patience, calling it an essential long-term holding.
Over the next 5-10 years the future for Nvidia looks so bright you need to wear shades.
Nvidia is the leader in computer graphics as even Microsoft (NASDAQ:MSFT) acknowledged in using it for its video game Minecraft. NVDA’s only cloud rival in data center graphics is Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), so cloud companies that want to keep up almost have to buy its silicon.
The same technology that makes computer games pretty and brings in the Bitcoin is essential to delivering artificial intelligence from clouds. Even if Advanced Micro Devices (NASDAQ:AMD) increases its share of an Nvidia market, Nvidia will prosper.
The data center business will be further fortified by the pending acquisition of Mellanox (NASDAQ:MLNX), whose internal communications fabric gives Nvidia a more complete solution for cloud builders. Nvidia has already announced a “cloud in a box” to bring new applications to the network edge, to factories and office buildings.
What AI Means for Nvidia
With Nvidia, artificial intelligence means computers can respond easily to natural language requests, making more applications self-service. In his conference call after the earnings announcement Huang said over 4,000 AI startups are now working with his company. Graphics chips are getting better at recognizing objects, bringing self-driving cars, trucks and buses closer.
The point is that AI isn’t just a cloud thing. It’s also an edge thing. Building intelligence into factories and cities, not just for maintenance but for regular operations, will be the next leg in demand. Chips for those applications are about to be released.
As a demonstration of what is possible, Nvidia is delivering Jetson Nano, a small-scale development kit with both hardware and software. These kits are available online for as little as $100 and by 2025, machine learning will be a $40 billion market.
The Bottom Line on NVDA Stock
Even if there’s a general recession ahead, technology is the first industry out of it. Office jobs that disappeared in the 2001 recession did not come back. Neither did the sales jobs that disappeared in the 2008 recession. It’s hard to tell which jobs will disappear this time, but at minimum there will be fewer operators standing by.
When automation becomes a survival strategy, Nvidia will be a good stock to be in. Since the bottom of the last recession NVDA stock is up 1,200%. More good times are ahead.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in NVDA and MSFT.
