Is Nvidia's artificial intelligence (AI) business recession-resistant?

Let's examine.

| More on:
Concept image of man holding up a falling arrow with a shield.

Image Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Nvidia (NASDAQ: NVDA) held its GPU Technology Conference (GTC) 2025 last month in San Jose, California. The artificial intelligence (AI) chip leader's annual happening is widely considered the world's leading AI event.

I watched CEO Jensen Huang's two-hour keynote address in real time, caught a couple of his interviews, and viewed several panel discussions about AI and humanoid robots. Great information was shared during all these events, particularly Huang's keynote. It was chock-full of promising new product launches and partnerships, reinforcing my bullish view of Nvidia stock as a long-term investment.

But there was one incredibly bullish thing he said during GTC week that most investors probably aren't aware of. It wasn't uttered during his keynote or an interview, but at the GTC Financial Analyst Q&A on March 19.

Is Nvidia's AI business better than "just" recession-resistant?

A Wall Street analyst asked this question at the Q&A event: "If there's a recession, what does that do to your business? To AI demand?"

Huang's answer: "If there's a recession, I think that the companies that are working on AI are going to shift even more investment toward AI because it's the fastest growing [area/space]. Every CEO will know to shift toward what is growing."

I think a reasonable interpretation of his answer is that he's suggesting a recession should increase, or at least not decrease, demand for the company's AI-enabling products. Those products, collectively, garnered at least 87% of the company's total revenue in its most recent quarter, which ended in late January. (The data center segment's products are essentially all AI-enabling, and this segment took in about 87% of the company's revenue in the most recent quarter.)

Huang's answer might seem counterintuitive, but it makes sense upon reflection. CEOs, especially in certain industries, realize that AI investments are now so critical that they are a necessity. Innovations in AI are occuring so rapidly that companies that cut back on AI investments even for a relatively brief time will likely fall behind their competitors in AI capabilities. This could lead to an existential crisis from which they might not ever recover.

Let's say that Apple decided to cut back on its AI investments during the next economic downturn or full-fledged recession. It could risk potentially permanently losing some of its iPhone customers to competitors, namely makers of cellphones that use Alphabet's Android operating system. That would be a risky move, since the iPhone is its bread-and-butter product.

As Palantir CEO Alex Karp bluntly put it in the AI-powered data analytics company's third-quarter 2024 earnings release, "The world will be divided between AI haves and have-nots." Indeed, it seems probable that the AI haves, which could be companies or countries, will be winners, and the AI have-nots will be losers.

Nvidia is built to weather tough times

NVDA Cash and Equivalents (Quarterly) Chart

Data by YCharts. Data as of each company's most recently reported quarter. Free cash flow numbers are for the trailing-12-month period.

What if Huang's statement proves inaccurate and demand for AI-enabling products and services -- including Nvidia's -- decreases during the next economic downturn or recession?

Investors should fear not, as Nvidia's balance sheet is hardy. The company is in a better position than most of its peers and competitors to weather a downturn in demand leading to lower revenue, earnings, and cash flows.

As the chart shows, Nvidia's cash position and long-term debt are roughly equal at about $8.5 billion to $8.6 billion. Chipmaker Advanced Micro Devices (AMD) has more cash than long-term debt, so it's also in good shape in this respect. But chipmakers Broadcom and Intel have much more long-term debt than they have cash, so they're using a lot of cash to service their debt. This is an OK situation for Broadcom because it has strong cash flows, at least currently, but Intel is bleeding cash. Over the last year, Intel's free cash flow (FCF) was negative-$15.7 billion, almost double its cash on hand.

Nvidia is an FCF machine. Over the past year, it churned out $60.9 billion in FCF. It could easily use its cash flow to pay down, or even fully pay off, its long-term debt. But it makes sense that it doesn't do so. The company's big cash position coupled with its massive FCF provides it with many options for investing in long-term growth initiatives.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Beth McKenna has positions in Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Alphabet, Apple, Intel, Nvidia, and Palantir Technologies. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Broadcom and has recommended the following options: short May 2025 $30 calls on Intel. The Motley Fool Australia has recommended Advanced Micro Devices, Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

Delighted adult man, working on a company slogan, on his laptop.
International Stock News

Prediction: This artificial intelligence (AI) stock will be worth $5 trillion in 5 years

Amazon is integrating artificial intelligence (AI) across many areas of its business.

Read more »

Robot humanoid using artificial intelligence on a laptop.
International Stock News

Google must win at artificial intelligence or its search business could crumble. Does this make Alphabet an AI stock to buy?

Here's a deeper look into how Alphabet is faring in the battle for AI supremacy.

Read more »

A delivery man wearing a cap and smiling broadly delivers two boxes stacked on top of each other at the door of a female customer whose back can be seen at the edge of a doorway.
International Stock News

2 "Magnificent Seven" stocks billionaires are buying

The Magnificent Seven includes some of the most profitable and dominant tech companies in the world.

Read more »

Happy man working on his laptop.
International Stock News

Prediction: This artificial intelligence (AI) stock will be the biggest winner of 2025

Artificial intelligence will be one of the biggest growth opportunities this century.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
International Stock News

Could Warren Buffett's last move as Berkshire Hathaway CEO be buying this beaten-down "Magnificent Seven" stock?

Buffett is a value investor at his core, and he doesn't often buy shares of expensive companies.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Prediction: This artificial intelligence (AI) stock will be worth $5 trillion in 3 years

Let's take a closer look at the catalysts that could propel this stock toward that valuation.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
International Stock News

This Artificial Intelligence (AI) chipmaker just got a game-changing boost from Amazon, and Nvidia investors should be paying close attention

Amazon just made a notable investment in Nvidia's top rival.

Read more »

Happy man working on his laptop.
International Stock News

A once-in-a-decade opportunity: Here's why I'm buying Alphabet stock like there's no tomorrow

Alphabet's stock rarely gets this cheap, and right now could be a once-in-a-decade opportunity to scoop up shares at a…

Read more »