What happened
There has been much talk in 2022 about what constitutes a recession. While the U.S. has hit many of the benchmarks that signify an economic downturn, other metrics have defied the trend, leading many to debate whether the economy is actually in a recession. A key economic indicator released early Thursday seemed to tip the scales toward those arguing that it is in a recession.
With that as a backdrop, shares of Nvidia (NASDAQ: NVDA) slipped as much as 5.5%, Snowflake(NYSE: SNOW) slumped as much as 4.5%, and Roku(NASDAQ: ROKU) tumbled as much as 8.4%. As of 12:33 p.m. ET, the trio were still trading lower, down 4.4%, 1.5%, and 8.3%, respectively.
To be clear, there was very little in the way of company-specific news driving these technology stocks lower. This suggests that investors weren't particularly pleased with the latest reading on the economy, leaving some running for cover.
So what
The U.S. Bureau of Economic Analysis released its report on the state of the economy, namely its calculations for gross domestic product (GDP) for the second quarter, and the revelation seemed to confirm investors' worst fears. GDP contracted at an annual rate of 0.6% during the second quarter of 2022, following a 1.6% decrease in the first quarter. This is unchanged from the initial estimate. Two consecutive quarters of declining GDP is the most widely used definition of recession, which suggests that the U.S. economy entered a downturn earlier this year.
The report noted that the smaller decrease in the second quarter was the result of stronger consumer spending and an uptick in exports. In all, nine of the 22 industry groups tracked by the report contributed to the decline in GDP.
It's important to note the "official" decision regarding a recession is made by eight economists at the National Bureau of Economic Research. This panel considers a laundry list of economic indicators, including nonfarm payrolls, industrial production, and personal consumption spending, in making its determination, which has historically been released well into a recession -- or even after it's over. The committee has yet to announce its findings regarding the current downturn.
Adding to investor anxiety was a rapid increase in 30-year mortgage rates, which surged to 6.7%, up from 6.3% the week before. This marks the highest rate since mid-2007.
Now 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.
Take Nvidia for example. In fiscal 2022 (ended Jan. 30), the semiconductor specialist posted record revenue of $26.9 billion, up 61% year over year. This resulted in diluted earnings per share (EPS) of $1.18, up 103%. 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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Danny Vena has positions in Nvidia, Roku, and Snowflake Inc. The Motley Fool has positions in and recommends Nvidia, Roku, and Snowflake Inc. The Motley Fool has a disclosure policy.
