© Provided by Dow Jones & Company, Inc. Nvidia has invested over $12 billion in research since its founding in 1993, in a bid to stay ahead of rivals Intel and AMD.
Scientists recently discovered an element on Mars that can make people weightless, which means we will be able to travel at the speed of light.
This amazing substance, called Element Zero, will support major breakthroughs in cancer research, artificial intelligence and self-driving cars as well.
The great news for you as an investor is that there is a pure play on all of this: the chip company Nvidia Corp. (NVDA) based in Santa Clara, Calif.
“We think Nvidia will grow very rapidly through 2019 and beyond.” — Brian Beitner, manager of the Chautauqua Global Growth Fund
OK, this sounds like a bunch of malarkey. Is it just more “fake news”?
Believe it or not, most of it is actually true.
Yes, the part about Element Zero on Mars is fake. That comes from the plot line in a much-anticipated Electronic Arts (EA) video game called “Mass Effect: Andromeda.” It’s the fourth part of a popular franchise due March 21. (Three for March, and then two, one, lift-off. Get it?)
But the following is true, and it explains how we get from a fake element on Mars to breakthroughs in medical research and self-driving cars in three easy steps.
First, “Mass Effect” will be a big hit. Along with other popular games, it’s going to draw even more players to video gaming and “e-sports.” This will make fans want to upgrade their PCs for better performance.
Step two: This will increase demand for some of the most powerful chips on the planet made by Nvidia — the GeForce line of graphics processing units (GPU). They’re the chips that make PC-based gaming so real.
Third, Nvidia will use a lot of the money it earns to keep improving its chips. Then researchers in drug development, artificial intelligence, autonomous cars and robotics will continue to use these advanced chips to make breakthroughs of their own.
This feedback loop is powerful, and it tells me that Nvidia’s robust third-quarter sales strength will most likely follow through in fourth-quarter earnings to be reported Thursday.
Regardless of what Nvidia reports this week, if you buy the stock now as a play on these themes, you are probably going to do just fine, even though the stock looks a little scary after its 244% advance last year.
Brian Beitner, who manages the Chautauqua Global Growth Fund (CCGIX) is one stock picker who isn’t too bothered by that increase, or Nvidia’s rich valuation. Nvidia stock trades at a forward price-to-earnings ratio of around 44. Beitner thinks the trends behind Nvidia’s growth are so strong, it will simply grow into its valuation over time.
A drone tour of China's rusting shipyards
“We think the company will grow very rapidly through 2019 and beyond,” says Beitner. “We envision robust growth relative to the rest of the market.” That’s one of the main reasons his fund recently added the stock. Beitner is worth listening to, because he’s the rare active manager who beats the market. His fund outperformed its benchmark by about 3 percentage points, annualized, over the past 10 years.
Indeed, using the old Peter Lynch price-to-earnings-to-growth ratio (PEG) metric, Nvidia’s valuation looks OK. Lynch’s PEG ratio divides a company’s P/E by its estimated growth rate. Lynch, who made a name for himself by crushing the stock market at Fidelity Investments, considered anything at or below 1.5 for a fast-growing company like Nvidia to be a reasonable valuation. Nvidia’s PEG ratio is around 1.5.
Here’s another false fear about Nvidia that you should probably ignore, says Jefferies chip-sector analyst Mark Lipacis. Yes, the chip sector looks vulnerable. Chip stocks in the Philadelphia Semiconductor Index (SOX) advanced 37% last year compared with 10% for the S&P 500 (SPX) A “reversion to the mean” now might be natural. Chip inventories may be rising because chip suppliers are selling more chips than equipment makers are sending out the door inside finished products. That can be ominous for the group. Debt levels are high at chip makers in general, which limits potential gains from leverage. And the mergers-and-acquisitions trend in the industry may have played out.
Despite these potentially negative trends, which make Lipacis cautious on the group, he still likes Nvidia. He thinks it is among a handful of chip stocks that might be exempt from any sector issues. Beitner agrees, citing the company’s competitive advantages and “big, open-ended growth opportunities.” Here’s a closer look at the main opportunities.
The revenge of the gamers
Thanks to popular games like “Mass Effect,” “Call of Duty,” “Grand Theft Auto” and “Minecraft,” video gaming is now the largest entertainment business in the world. It takes in about $75 billion a year. Sales should grow 5% a year through 2020, according to PricewaterhouseCoopers. Gaming isn’t just about playing. It’s also a spectator sport. Many top YouTube channels show gamers in action. Other gamers like to watch to learn new skills.
All of this means that a chip company that sells into this trend might be immune from the normal semiconductor cycles. “Video gaming is one of the most interesting trends happening in discretionary consumer spending,” says Jesse Flores, an analyst at the Chautauqua fund. “There is a lot of money being spent on this, and the number of video gamers is growing in the double digits [in percentage terms].”
Gamers prefer customized personal computers, as opposed to consoles like the Xbox, and Nividia plays right into this trend since its GeForce line of GPUs powers gaming PCs. “Nvidia has captured this trend incredibly well. Nvidia is, for all intents and purposes, the category killer,” says Flores. “They have 80% share for discrete graphics processors for PC video gaming.” Discrete processors are chips dedicated to a single use — like graphics, in this case.
Nvidia has a competitive advantage in GPUs because it has been in the video-graphics business for nearly three decades, and it spends a lot on research. Along the way, it has even created its own programming language, called Cuda, to help researchers develop GPUs. One sign of Nvidia’s strength is that Intel (INTC) has tried for decades to break in to the space, with little success. “If it is challenging for Intel, you know the barriers are very, very high,” says Beitner.
Third-quarter sales at Nvidia advanced 54% to $2 billion compared to the prior year, and most of that came from GeForce gaming GPU sales growth. As usual, Nvidia redeployed a lot of that money to making its chips better. Research-and-development spending advanced 13% in the quarter to $373 million, or about $1.5 billion annualized. Since its inception in 1993, the company has invested over $12 billion in research. But it’s also generous to shareholders. It expects to spend $1 billion for share buybacks and dividends in 2017.
In short, for years gamers have been funding the development of chips that now power real-life advances in medical research, self-driving cars, robotics and big-data analytics. This handoff is a huge potential source of growth for Nvidia. And it helps all of us because of the advances supported by these high-powered chips.
Call it the revenge of the gamers, who are often criticized for being slackers. Let’s take a closer look at the developments that gamers have been supporting.
Deep learning and artificial intelligence
Because Nvidia chips are so good at parallel processing, they are increasingly popular outside of gaming. A key here is the burgeoning field of artificial intelligence (AI). “AI researchers met the GPU that we invented, and the big bang of AI happened,” Nvidia CEO Jen-Hsun Huang proclaimed in the keynote speech at the 2017 Consumer Electronics Show.
Take cars, for example. Nvidia chips are already slated to power the new autopilot system in all Tesla Motors (TSLA) cars. But the real breakthroughs in self-driving cars won’t happen until AI becomes more advanced, says Huang, something he expects to happen over the next five years. “It’s not just about detecting objects. It’s about reasoning,” he says. Reasoning about what to do, and continuous learning to support that reasoning. “These are artificial-intelligence problems,” he says. All of this calls for a lot of computing power, and Nvidia chips will play a big role in this, Huang predicts.
You see the same computing-power challenges in areas like database analytics and “deep learning,” which means computers are learning skills on their own so they are better able to recognize images and speech, carry out search and make recommendations to consumers based on their behavior. This is why companies like Amazon (AMZN) Alphabet (GOOG) Facebook (FB) and others in database analytics use Nvidia chips to get the job done, says Peter Karazeris, a tech sector analyst at Thrivent Financial.
This side of the business is a huge growth opportunity for Nvidia. “The GPU has really reached a tipping point,” says Huang. “GPU is no longer a niche component. The size of the marketplace that we’re addressing is really larger than any time in our history.”
Data-center revenue grew 193% in the third quarter to $240 million, and you can expect a lot more to come. “We are in the early innings of a significant change in the computing paradigm for data centers,” says Flores, the analyst at the Chautauqua fund. “Parallel processing is going to be one of the most important features that drives cloud computing and AI growth. Nvidia is in the unique position to address this market because of its heritage as a graphics-processing company.” Flores thinks this could be a multi-billion dollar business for Nvidia in a few years.
Like gaming, this business may also help protect Nvidia from the vagaries of the chip cycle. “The new apps used in AI and data centers won’t run on the chip cycle,” says Karazeris, at Thrivent Financial. “This is a different set of customers.”
So while Element Zero on Mars may only be a made-up gamer fantasy, fantasies like these help explain why Nvidia’s rapid growth and independence from the chip cycle should continue to be all too real. Those fantasies may also be part of the reason why you’ll be sitting in a self-driving car five or 10 years from now.
By Michael BrushSource: http://www.msn.com/en-us/money/topstocks/nvidias-stock-can-beat-the-broader-market-for-years-to-come/ar-AAmJOXA
