The coronavirus has pounded the stock market indices overall. But not all sectors are feeling equal amounts of pain. A bunch of “old economy” stocks such as retail and restaurants have been demolished. Meanwhile, tech has fared better than most. Believe it or not, as of this writing, the Nasdaq-100 tech index is up a few percentage points over the past six months, with securities like Nvidia (NASDAQ:NVDA) stock leading the way.
In fact, Nvidia stock is up year-to-date, and it is up roughly 40% over the past 12 months. It has managed to achieve these stellar returns for a couple of reasons.
For one, it has a fantastic balance sheet, giving it the ability to ride out all sorts of challenges that have been thrown at the semiconductor industry since 2018.
Equally importantly, the company has numerous ways to win as society continues to become more and more digital. Several emerging trends should help power up fantastic earnings growth for Nvidia in coming years.
Technological Change Grows Faster
There’s a phenomenon called the “law of accelerating returns,” which states that, over time, the speed of technological disruption increases. For example, in the span of just a few years, Amazon (NASDAQ:AMZN) went from upstart to a company capable of creating the world’s wealthiest person in Jeff Bezos.
In just 25 years, Amazon has become a market leader across a wide number of products and industries. This would have been nearly impossible in any earlier era. Similarly, Uber (NYSE:UBER) went from a cool concept to putting taxi companies out of business within a decade.
Every year, it seems, new technologies pose an even greater threat to stalwart blue-chip companies. This period of creative destruction is intensifying. And now, thanks to the coronavirus economic shock, we’re going to see massive fundamental changes to the economy virtually overnight.
Nvidia: At the Forefront of the Next Big Shift
To protect your portfolio, you need to have exposure to these nascent trends. And let’s be clear: All roads lead to Nvidia. Thanks to the company’s dominance of the GPU market, it is at the very center of several powerful multi-decade growth waves, including gaming, data centers, autonomous vehicles, AI and machine learning.
These “buzzword” growth industries all share a common trait: They eliminate or reduce human involvement or face-to-face human contact. Before Covid-19, that trait was only an economic consideration — i.e., if a machine can learn to do something, we might be able to replace a human worker.
There was a lot of theoretical discussion about the possible effects of automation, augmented reality, telecommuting and other potential trends. However, up until now, it was mostly talk. But then everything changed.
Covid-19: The Great Accelerator
Now, some of these traits are a life-and-death health consideration. Videoconferencing is one of many examples, as it is now the only practical way to continue many types of business during the stay-at-home period.
And, needless to say, videoconferencing uses a tremendous amount of data and bandwidth. What do you need to carry all that traffic? You need more data centers, which are likely to be powered by Nvidia equipment. Use of video rather than face-to-face communication will likely drive more Nvidia graphics card sales, and so will people upgrading their home computing devices.
Gaming might also go on a hyperbolic growth trend. There are several reasons for that. For one, with people cooped up, it’s a great time for video games. Junior may be down in the basement playing Activision’s (NASDAQ:ATVI) World of Warcraft instead of doing his “online school” projects. And think beyond that. There’s also the budding e-sports industry that might explode because they’re the only sports being played right now. This could be an inflection point where e-sports become a mainstream popular activity.
The Verdict on Nvidia Stock
Even after the recent selloff, NVDA isn’t a cheap stock based on near-term earnings. Nvidia has earned between $4.59 per share and $6.81 per share of profits over the last three years, meaning the stock is trading around the 40x to 60x earnings range based on recent years’ results. And 2020 earnings won’t be a blowout figure either. For investors just looking at past performance, they’re bound to miss the Nvidia story.
If you look past the current crisis, however, the picture changes entirely. Look to the next waves of technological disruption, and Nvidia stock seems like a steal. Over the next three to five years, these mega-trends in fields such as videoconferencing and gaming could take off, creating exponentially more demand for Nvidia’s products.
There’s one other thing in Nvidia’s favor as well. The company has a rock-solid balance sheet, with more than $8 billion in net cash. This means that it can cover all its debts and have plenty of funds left over. Regardless of what may happen with the virus, trade wars, the Chinese economy or other potential risks, Nvidia has plenty of staying power to ride out any near-term crisis. Nvidia thus has a high degree of safety, while offering tremendous leverage to several emerging super-trends that could transform the next decade.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.
