Two sectors that are at the top of my list of Tech Revolutions would be smart cars and virtual reality. I can think of a handful of burgeoning tech revolutions that will grow 100% or more per year for the next three to five years, including artificial intelligence, big data and wearables. But today I want to focus on smart cars and VR.
Which brings me to Nvidia.
Nvidia is the clear leader in the gaming graphics world, with nearly 90% of the market using Nvidia GPUs (graphics processing units). And it’s these GPUs from Nvidia that will be driving many of the high end virtual reality products from the likes of Facebook’s Oculus Rift and the HTC Vive. Nvidia says that these high end virtual reality platforms will require 7x the graphics processing power that today’s video games require. Nvidia’s processors will be the driving force behind any high end virtual reality applications, such as doctor visits, sports and so on. If applications for high-end virtual reality come to market quickly and the price of high-end virtual reality products comes down quickly to help those applications come to market quickly, Nvidia’s has the potential to earn a billion or so dollars from this sector in the next five to ten years.
Meanwhile, Nvidia has spent the last few years trying to position itself as a primary platform for any self-driving cars. See their webpage about the topic here. From that webpage: “NVIDIA DRIVE™ solutions give automakers, tier 1 suppliers, and automotive research institutions the power and flexibility to develop systems that enable cars to see, think, and learn. DRIVE PX is a powerful auto-pilot car computer designed to run deep neural networks paving the way for the autonomous car. DRIVE CX is a complete platform for the digital cockpit that enables advanced 3D navigation and infotainment, high-resolution digital instrument clusters, natural speech processing, and surround vision.”
Sounds pretty cool, huh? If Nvidia becomes the de facto standard chip platform for autonomous cars, the company has several billions of earnings ahead of it in that industry over the next ten years.
Nvidia’s not without risk though. They don’t supply Sony’s Playstation virtual reality platform, which is shaping up as the most likely to go mainstream at a price point that’s 1/3 of what Oculus Rift and HTC Vive platforms will go for. And Nvidia’s struggled in the smartphone business while it’s graphics business has been a bit stagnant along with the broader PC cycle over the last few years.
Nvidia has about $5 billion in cash offset a little bit by about $1.5 billion in debt. The company’s market cap is $17 billion and analysts expect another year of low single digit growth for the topline as it will take a few quarters still to get the VR and auto-car businesses up to scale and even a year or two more after that to go mainstream. The stock is trading at about 20x next year’s earnings on a P/E basis which goes down to about 18 when you include the $3.5 billion net cash (about $6 per share). We also get a 1.5% dividend yield to boot.
Nvidia’s got to grow faster than single digits next year for this stock to work. But with the potential for 20-30% growth in the VR and Smart Car Revolution, I think the stock could double or triple from these current levels over the next five years.
I’ll be watching this company’s technological platform and sales trends like a hawk in the next few quarters and will look to sell the stock if the company fails to catch serious traction in either VR or smart cars.
For now, I am putting my toe in the water and buying a 1/3-sized tranche position of $NVDA common stock to get started.
I would look to add another tranche if the stock drops below $30 and/or in the next few days or weeks if the markets tank and give us the chance to nibble on this name in a broader market downdraft.