Investors looking to succeed in investing have no better example than legendary Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett. Since 1965, his company has generated compounded annual gains of more than 20%, increasing by the end of 2018 a whopping 2,472,627%.
One particularly useful piece of advice from the Oracle of Omaha is this gem:
Every company goes though rough patches, leaving investors fearing for the worst, when perhaps they should be seeing an opportunity to get greedy. With that in mind, let's look at three growth companies facing short-term challenges that might represent compelling opportunities: NVIDIA (NASDAQ: NVDA), Activision Blizzard (NASDAQ: ATVI), and IPG Photonics (NASDAQ: IPGP).
A chip off the old block
NVIDIA had been riding high, experiencing a trifecta of growth catalysts: strong demand for its graphics processing units (GPUs) from gamers, increasing adoption for data centers and artificial intelligence, and significant demand generated by those mining cryptocurrency -- all contributing to the stock's multi-year run. The bottom dropped out late last year when growth in two of sources seemed to dry up. The cryptocurrency bubble burst, reducing demand for GPUs and leaving excess inventory in the channel. Then, weaker demand from its booming data center segment caused a year-over-year decline of 10% -- after years of double- and even triple-digit gains in the segment.
This one-two punch caused revenue to fall 31% and 24% year over year, respectively, in the two most recent quarters. This dismal performance sent investors running for the exit, and the stock shed more than half its value.
All is not lost, however. NVIDIA CEO Jensen Huang said on a recent conference call, "The entire reason for [the] Q4 and Q1 [shortfall] is attributed to oversupply in the channel as a result of cryptocurrency." Once this excess inventory is cleared out, the company expects GPU sales to return to "normal levels for gaming." NVIDIA also addressed the "pause" in data center spending, explaining that hyperscale customers bought excess supply last year. The company expects the situation to persist into the second quarter but expects the second half to be "sizably larger" than the first, with the data center segment returning to growth.
In all, these challenges should be short-lived, and NVIDIA stock should soon resume its upward trajectory.
Play the game
Activision Blizzard was on the heels of a multiyear sprint, with the stock price quadrupling since 2015. Suddenly, the company was in freefall, over fears that free-to-play battle royale titles like Epic Games' Fortnite were eating into its results. Revenue fell by 7% year over year during the third quarter of 2018. Even worse than the disappointing sales were the three consecutive quarters of falling monthly active users -- a metric that helps measure engagement -- which declined about 12% during the same period.
It's worth noting that the engagement and revenue difficulties began just about the same time Fortnite Battle Royale was released in September 2017.
Activision Blizzard isn't taking the news sitting down. On a conference call early this year, the company announced a massive restructuring of its development efforts, increasing the number of developers assigned to key franchises. This will result in a more consistent flow of content including up-front releases, in-game content, and mobile and geographic expansion, as well as eliminating investment in disappointing titles.
These efforts are beginning to bear fruit. While revenue declined 7% year over year in the most recent quarter and earnings fell 11%, both top- and bottom-line metrics exceeded management's guidance from three months ago.
Activision just got some love from analysts, citing increased investment in core games, further expansion into mobile gaming, and new content for under-monetized titles as catalysts that are expected to drive the stock higher.
Big trouble in Greater China
IPG Photonics was achieving all-time highs early last year, before the trade war took its toll. The laser maker was hit by softer demand in China and Europe that were "driven by macroeconomic and geopolitical factors rather than competitive dynamics," causing the stock to lose more than half its value from recent highs.
The saber-rattling continues between Beijing and Washington, D.C., but things are beginning to look up. Even though revenue fell 12% year over year, IPG CEO Dr. Valentin Gapontsev noted that during the quarter, "business trends improved in China driving sequential growth in orders." The company also took the situation as an opportunity to substantially reduce component and manufacturing costs, which will benefit not only the current quarter, but also many more in the future.
The current political climate won't go on forever. China is one of IPG's biggest markets, and once the trade war runs its course, it will once again be business as usual for the laser pioneer.
The inevitable disclaimer
While these are solid companies facing temporary setbacks, there are no guarantees things will turn around any time soon. That said, the time to be greedy is when others are being fearful, and initiating positions in these companies or adding to them now look like pretty solid bets for investors with a long investing horizon.
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Danny Vena owns shares of Activision Blizzard, IPG Photonics, and NVIDIA and has the following options: long January 2021 $22.50 calls on Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard, Berkshire Hathaway (B shares), IPG Photonics, and NVIDIA. The Motley Fool has a disclosure policy.