If you just look at the points gained or lost in a day — down 1,000 points then up 400 — you want to get off the roller coaster. But if you ask yourself where stocks like Nvidia, Apple and Tesla will be trading in 5 years, you can see today’s volatility as a chance to buy stock cheap.
In the crash of 2008, the Dow 30 often gained or lost more than 1,000 points in a day. It is understandable why no one wants to go through that again. However, today’s volatility is nothing like we had in 2008. Before the 2008 crash, the Dow was just shy of 14,000 so a 1,000 point move was about 7%. A 1,000 point move today is about 4% — still a big move, but not nearly as scary.
More importantly, in 2008, there was a real possibility that the world’s financial systems were breaking down with many of the largest firms in danger of going bankrupt. The S&P 500 fell 37% that year. But even then, if you had the capacity to make a 5 year investment in 2008, you could have bought almost anything and made money.
Today’s volatility is not the same as 2008. That’s the good news. The bad news is that you can’t just buy anything and be comfortable you’ll make money in 5 years.
However, there is a strong case that 5 years from now Nvidia, Apple, and Tesla will be trading at higher prices. Recent market volatility has brought each of these stocks down a bit from recent highs giving us a chance to get into a good 5 year investment at a discount. Let’s briefly review the case for each stock.
Nvidia: Nvidia’s price-to-earnings (PE), is about 60. When you pay 60 times earnings, you want clarity on where the growth will come from to keep the stock price moving up. Nvidia’s near-term growth is coming from people using Nvidia’s graphics chips to mine for crypto-currencies like Bitcoin. However, the same graphics chips have broad applications for artificial intelligence (AI).
In the next 5 years, many products will be endowed with some degree of AI and it looks like Nvidia will benefit from almost all of them. For example, the technology for self-driving cars uses Nvidia technology. None of these AI applications have hit the mainstream yet, so Nvidia is still a little under most people’s radar. But over the next 5 years, there are several AI applications in the pipeline that are large enough to drive Nvidia to double from current prices.
Apple: Apple has been a growth stock for such a long time, that most people are surprised to find that it’s PE is only 17. When the S&P 500’s PE is 25, a stock with a 17 PE is trading like a value stock with no future. Apple has made mistakes since Tim Cook became the CEO. Hobbling the iPhone 6 and 7 to overcome a battery problem is the most recent mistake. Releasing the latest Mac OS (High Sierra) with a serious security flaw that allowed users to have root access without entering a password is another example. Nevertheless, at 17 times earnings. the market is wrong about Apple.
Apple will benefit from the recent change in the tax law by bringing back to the U.S. most of the $252 billion it holds in cash overseas. This is more than enough to make the investments needed to keep the company growing. In addition, with the iPhone X, Tim Cook is both increasing sales and profitability at the same time. Apple can deliver a great return in the next 5 years by growing revenues and profits enough to convince the market it deserves a PE at least equal to the S&P 500.