Looking for the Next Nvidia (NVDA)

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There are a lot of people, I’m sure, who looked at Nvidia's (NVDA) blowout earnings and the spectacular market response that ensued with at least a tinge of regret. After all, the story has been out there for everyone to see for quite some time: Nvidia is a company that fits current trends, at the forefront of supplying several rapid-growth areas of the economy such as AI and autonomous vehicles, and yet there will be people who looked at the valuation at the start of this year and just couldn’t see how the stock could move much higher, let alone add close to 200% in five months. Now even though there is no reason NVDA can’t go higher still if they continue to dominate their markets, it looks to those people like they missed their chance and they will be looking for the next Nvidia.

We can learn a few things from the Nvidia story, particularly not to avoid the obvious. As I said, the reasons to believe that NVDA would prosper were well known and, for many people, that was reason enough not to buy the stock. There are those who are always looking for something hidden, who cannot see the forest for the trees, and they will always eschew the obvious play. They are the people who bought other EV startups rather than Tesla (TSLA), and who stayed convinced for years that another search engine would overtake Google (GOOGGOOGL).

Then there is the simple fact that management matters, and past performance is a pretty good indicator of how effective a C-suite team is. Nvidia’s stock has fluctuated based on market perception and mood, but their actual performance has been consistently strong, and they have followed a consistent vision. That was clear as far back as early 2019, when they bought Mellanox to enhance their presence in the then nascent AI field, something even I could see was a savvy move at that time.

So, if you are looking for the next Nvidia, then you need to look for a company with a clear vision and a strong management team, and not to ignore the obvious plays.

One stock that definitely fits on all three fronts, even if most wouldn’t think of it as a growth stock with massive potential, is Microsoft (MSFT). Their focus on AI is certainly upfront given their involvement with OpenAI, the makers of ChatGPT, and is clearly part of a long-term vision for the company that moves them away from the PC operating systems on which they were built and towards faster growing parts of the tech world. As for the management angle, that vision is the product of CEO Satya Nadella, who, based on where the company was when he took over and where it is now, is clearly one of the top strategically-minded CEOs in the world.

Even though MSFT is transitioning from one area of tech to another, just as NVDA did when it moved on from being purely a maker of graphics cards for gaming to being an AI power, the company is still diverse and, for some people, probably not focused enough on the AI side of things. If you are one of them and are looking for a purer play that still fits the criteria, how about Marvell Technologies (MRVL)?

They are certainly obvious, having also released great earnings and provided positive guidance this week in a way that sent the stock soaring. Their specialty is making components for data centers which, given that AI programs learn from data, is almost certain to be an area of growth as AI fulfills its potential, so they are focused on the right things. This week’s earnings also showed that they have a management team who can execute a clear vision.

The big pop that followed those earnings may be a reason to hold off for a while as there will probably be a bit of a pullback before too long, but from a long-term perspective, P/Es in the 20s and a valuation of just over 2x book value indicate that there is still value in the stock, even after a big jump. If that concerns you, keep in mind that NVDA popped on good earnings several times before getting to these levels, including a big jump following earnings released in August of 2021 that took it to around half of its current price.

Having worked in dealing rooms for decades, I am very familiar with the phrase "I was gonna..." -- as in, "I was gonna buy that thing that just jumped up, but it looked too expensive, so I bought something else instead." If you find yourself thinking like that after watching NVDA over the last few days, it may be worth looking forward to the next opportunity rather than looking back at the one you missed.

It may be that MSFT or MRVL will appeal to you, or it may be that you will find something else. Whatever you arrive, keep in mind that the investment thesis doesn’t have to be obscure for a company to still have potential, and they can only fulfill that potential if they are well-run. Using those two themes will give you at least a shot at finding the next Nvidia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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