Why Nvidia, Snowflake, and Roku Stocks Slumped Thursday Morning

In 2022 there has been a lot of discussion on what a recession is. Many of the indicators of an economic downturn have been met in the United States, but other metrics have resisted the trend, raising the question of whether or not the economy is genuinely in a recession. A significant economic indicator that was issued early on Thursday seems to support those who claim that the country is experiencing a recession.

What took place

In light of this, shares of Nvidia (NVDA -0.66%), Snowflake (SNOW -0.22%), and Roku (ROKU -0.67%) all experienced declines of up to 5.5%, 4.5%, and 8.4%, respectively. The three were still trading down at 12:33 p.m. ET, down 4.4%, 1.5%, and 8.3%, respectively.

To be clear almost little company-specific news drove the prices of these technology stocks lower. This implies that some investors sought refuge after receiving a less-than-pleasant reading on the economy.

What then

The U.S. Bureau of Economic Analysis published its report on the status of the economy, including its estimates for the second quarter’s gross domestic product (GDP), and the information appeared to confirm investors’ worst suspicions.

Following a 1.6% decline in the first quarter, GDP shrank at an annual pace of 0.6% in the second quarter of 2022. This is the same as the original prediction. The most common definition of a recession is two consecutive quarters of decreasing GDP, which indicates that the U.S. economy began a slump earlier this year.

The report indicated that higher consumer spending and a rise in exports were to blame for the second quarter’s lesser decline. Nine out of the 22 industry groupings the research covered overall played a role in the GDP drop.

It’s important to note that the National Bureau of Economic Research’s eight economists make the “official” call on whether or not there is a recession.

In making its decision, this panel takes into account a long number of economic indicators, such as nonfarm payrolls, industrial production, and personal consumption spending. Historically, the panel has announced its findings far into a recession or even after it has ended. The committee has not yet made public its conclusions about the present economic crisis.

A sharp rise in 30-year mortgage rates—from 6.3% the previous week to 6.7% this week—added to investor angst. Since the middle of 2007, this rate is the highest.

So what?

A check of all the usual suspects — company press releases, regulatory filings, and analyst opinions — turned up no catalysts to explain the stock price decline for this trio of stocks.

This suggests the decline is merely a knee-jerk reaction to the dismal economic data. However, it’s important for investors to keep in mind that many of these economic indicators look to the past, not the future — and the future looks bright for these three tech stocks.

Consider the case of Nvidia. The semiconductor expert reported record sales of $26.9 billion for the fiscal year 2022 (which ended on January 30), up 61% from the previous year. Diluted profits per share (EPS) increased by 103% to $1.18 as a result.

However, in its fiscal 2023 second quarter, the flailing economy weighed on results, as quarterly revenue of $6.7 billion grew just 3%, while EPS of $0.51 slumped 51%. This suggests that even as the company’s current results have been pressured by the economy, it is well positioned to come roaring back once conditions improve.

Cloud-native data analytics company Snowflake also had a banner year. In fiscal 2022 (ended Jan. 31), revenue of $1.2 billion grew 106%.

While the company wasn’t yet profitable under generally accepted accounting principles (GAAP), it produced strong operating and free cash flow, which suggests profits are merely a matter of time. Snowflake has held up remarkably well during the current downturn. In its fiscal 2023 second quarter (ended July 31), revenue of $497 million jumped 83% year over year.

While profits are still elusive, it continues to generate robust cash flow.

Streaming video platform Roku closed out last year with a bang, with revenue of $2.8 billion up 55%, while net income of $242 million swung to a profit. However, of this threesome of stocks, Roku has been among the hardest hit recently.

Second-quarter revenue of $764 million grew 18%, while swinging from a profit back to a loss. On the plus side, cord-cutting continues and the number of subscribers abandoning cable TV this year is on track to surpass 2021 levels. Many of these viewers will turn to streaming video, providing a secular tailwind for Roku.

Finally, in the face of the ongoing bear market, shares of Snowflake, Nvidia, and Roku actually look like compelling opportunities. The trio are currently selling at 18, 10, and two times next year’s sales, respectively, each near their lowest valuations in several years. Roku is clearly a bargain at this price and while Snowflake and Nvidia aren’t exactly cheap, their historical growth rates and industry leadership argue that they’re worth paying up for.

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