The stock market witnessed a brutal sell-off last week as investors went into panic mode following a surprise spike in inflation for the month of August. The Consumer Price Index released by the Bureau of Labor Statistics revealed that prices increased 8.3% year over year in August. The month-over-month increase came in at 0.1%.
Economists were expecting prices to decline 0.1% over July and were looking for a year-over-year increase of 8.1%. However, the unfavorable readings set the cat among the pigeons and on Sept. 13 the stock market witnessed its worst day since June 2020.
This sell-off means that celebrated investor Cathie Wood, CEO of investment management firm ARK Invest, continues to have a torrid time this year as far as her picks are concerned. The ARK Innovation ETF has shed 57% of its value in 2022, which is not surprising considering the fund’s exposure to fast-growing companies that could disrupt industries.
Two of the fund’s constituents — Nvidia (NVDA 0.65%) and Unity Software (U -0.85%) — have witnessed a brutal sell-off this year. While Nvidia is down 55% in 2022, Unity Software stock has crashed 74%. However, both of these stocks could make a terrific comeback over the next five years and their share prices could double. Let’s see why.
Nvidia’s year has gone from bad to worse in recent days after the U.S. government imposed restrictions on sales of data center chips to China, a move that could further dent the company’s ability to turn its business around in the near term. Nvidia is already struggling on account of weak demand from the gaming segment where there is an oversupply of graphics cards.
Weakness in the gaming and data center markets, which are two of Nvidia’s biggest businesses, means that the tech giant’s near-term outlook isn’t all that great. As it turns out, analysts expect the company’s top line to remain flat in fiscal 2023 at $27 billion, a far cry from the 61% revenue growth it enjoyed last fiscal year.
However, Nvidia is expected to regain its mojo in fiscal 2024.
What’s more, Nvidia is expected to sustain its impressive earnings growth over the next five years, with analysts forecasting a 23% annual increase in earnings during the forecast period. That’s not surprising as Nvidia has some solid growth drivers that could help it come out of its slump and deliver healthy growth in this timeframe.
The demand for gaming graphics cards, for instance, is expected to increase at an annual pace of 14% through 2026, according to Mordor Intelligence. This doesn’t seem surprising as the personal computer (PC) gaming market is expected to thrive in the long run thanks to the influx of new gamers. IDC estimates that gaming PC shipments could exceed 52 million in 2025 compared to the 41 million units shipped in 2020. This would represent a 27% increase in units shipped over 2020’s figure.
With Nvidia being the leader in the gaming graphics card market with an estimated market share of nearly 80%, according to Jon Peddie Research, it is well placed to take advantage of the long-term growth opportunity in this space. Similarly, the data center market is going to be another major catalyst for Nvidia. The company has expanded its addressable opportunity in the data center space with the addition of server chips to its product portfolio, an area it wasn’t present in before.
All this indicates that Nvidia is in a solid position to increase its earnings at a nice pace over the next five years. Assuming the company clocks the 23% annual earnings growth that analysts are forecasting, its bottom line would increase to $9.54 per share after five years, based on the current fiscal year’s estimated earnings of $3.39 per share.
The stock is currently trading at 43 times forward earnings, which is in line with the five-year average. That’s assuming a similar multiple after five years would translate into a stock price of around $381, which would be nearly triple Nvidia’s current stock price of around $135. So, savvy investors may want to take advantage of the steep decline in this tech stock, as it seems built for solid long-term growth.
2. Unity Software
Unity Software stock has lost its wheels over the past year, with its post-IPO (initial public offering) surge now looking like a long-lost memory.
Unity’s fall from grace isn’t surprising. The stock was trading at a rich 40 times sales in 2021, and the market hasn’t been kind to companies with such sky-high valuations this year. At the same time, Unity’s pace of growth has slowed down remarkably. Its second-quarter revenue was up just 9% year over year to $297 million. For comparison, Unity’s 2021 revenue shot up 44% to $1.1 billion.
Analysts expect Unity to finish 2022 with nearly 22% revenue growth; likewise, they expect the loss per share to double to $0.44. However, Unity’s growth is expected to pick up from 2023. Analysts anticipate 27% top-line growth next year to $1.72 billion, while the loss is expected to come down to $0.03 per share.
The company is expected to become profitable in 2024 with earnings of $0.23 per share.
Unity looks capable of clocking such impressive growth as it provides services to create and operate real-time 3D and 2D content. The demand for its offerings should increase in the long run thanks to catalysts such as the metaverse. For instance, the demand for digital twin services that Unity offers is expected to increase at an annual rate of nearly 40% through 2030, with the market expected to reach $126 billion in revenue at the end of the forecast period.
All this tells us why analysts expect 69% annual bottom-line growth from Unity for the next five years. Such impressive earnings growth could rub off positively on Unity in the long run. They could also help the stock double. This makes Unity stock an ideal bet for investors looking to buy shares of a beaten-down name with the potential for impressive long-term gains.