NVDA: gives away

Investment Analysis Clubs Saul’s Investing Discussions
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https://www.barrons.com/articles/a-new-a-i-era-dawns-for-chi…

In the past two decades, that business model changed as more young companies emerged that didn’t manufacture finished chips. Instead, they provided a blueprint that can be used by vendors to make chips with specific features. The so-called IP companies licensed the blueprints to chip makers for a fee…

…Nvidia normally sells finished chips, like Intel, but last fall it did something very unusual: It published all the specifications for its AI circuitry, offering the designs free to anyone who wants them as “open source” technologies…

…for an established vendor to make its designs available as open source is unheard of, says Demler. “It’s going to definitely shake some things up” in AI chips. he says…

…For Nvidia, this strategy is driven by the prospect of establishing an industry standard for programming AI based on Nvidia’s blueprints. That might, in turn, attract even more AI scientists to devote more resources to Nvidia’s designs, fueling further chip sales…

I did not know that NVDA did this last year. I think that if this moves helps NVDA to support a global industry standard based on its designs and if NVDA continues to innovate faster than any other company then NVDA will help ensure that it becomes the predominant beneficiary of the coming IoT boom.

I have been saying that I like to invest in company that can grow 10x [I mean the share price]. I have been saying for at least 6 months that NVDA could potential grow 10x but I did not know that it would. One can never really know. It’s just too hard to predict. After last week’s GTC conference where CEO Jensen Hwang presented his keynote, I became a bit more confident that NVDA may be able to grow 10x. Well, just 2 days later while on Cramer, I heard Hwang utter the words. He said that the 4 growth drivers, gaming, data center, professional visualization, and autonomous vehicles, will make NVDA 10 times bigger than it is today [I’m paraphrasing but I heard him say it]. I share his opinion.

Another things he said what that anything that moves will be someday autonomous. This is another thing that I have been saying for a while. Self-driving cars is not the only thing that will be enabled by AI. It’s anything that moves and needs a brain. NVDA is developing the capability to make faster, better, smaller, more energy efficient brains.

Today, Apple is still the world’s most valuable company at $800B. If NVDA were to grow 10x from here it would be worth $1.4 trillion. Yes, becoming the largest company will be a moving target as companies like MSFT and AMZN close in on and may soon pass Apple. For me it’s not important that NVDA become the biggest, but rather it is important [for investing decision purposes] to be invested in companies that have a great potential for further growth. In my opinion NVDA still meets my criteria.

Chris

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Chris, did the article discuss much about Jensen’s keynote?

Anything about the AIRI that Pure announced this week?

I came across this article about the AIRI earlier tonight. Sounds like it will be about a $1.2M hoss of a device, with component revenue probably to be split somewhere close to 50/45 for NVDA and PSTG (remainder for Arista and others). I know several questions came up on the board about that earlier this week.
http://www.theregister.co.uk/AMP/2018/03/27/pure_nvidia_ai_a…

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<It published all the specifications for its AI circuitry, offering the designs free to anyone who wants them as “open source” technologies…>

Does this mean AMD can use them then? I’m thinking they need a little something to catch up?

Oh…haha
Yes, when you are #1 and know it NVDA

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If NVDA were to grow 10x from here it would be worth $1.4 trillion. – Chris

I would suggest that the CEO’s prediction of growing to be 10x bigger is based on sales dollars being 10x greater, not market cap. We can expect NVDA’s PE to drop over time like any other successful company from its current 35 or so (forward PE) and a 10x market cap may not be realized if/when sales are 10x the current level. Not a certainty, just pointing out that is what happens over time.

Don’t think that I’m being negative on the company. To the contrary, I agree that the company is doing amazing things that are rewarding shareholders. As a disclosure, my NVDA holdings are over 12% of my portfolio. Hoping for a share price run to $300 by 2018 year end since most of my position is in January 2019 call options. :slight_smile: And I think that is possible based on NVDA’s ongoing tendency to significantly outperform earnings expectations.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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<I<I would suggest that the CEO’s prediction of growing to be 10x bigger is based on sales dollars being 10x greater, not market cap. We can expect NVDA’s PE to drop over time like any other successful company from its current 35 or so (forward PE) and a 10x market cap may not be realized if/when sales are 10x the current level. Not a certainty, just pointing out that is what happens over time.

Hi Rob,

Yes, I think Hwang probably meant revenue. So the question then becomes what a 10x increase in revenue might do to the share price:

  1. Let’s assume for argument’s sake that revenue can continue to grow at at the same full year revenue growth rate. If you average the past 5 quarters then you get about 45% growth per year. At this rate, they will grow revenue 10x in a little more than 6 years. I think that is a reasonable assumption given that:
    a) revenue is constrained because they have not been able to produce enough product and NVDA will likely solve this issue. Gaming GPUs are out of stock, Titan V is out of stock.
    b) data center revenue is growing like mad and 3 quarters ago NVDA had a transitionary period where they were priming the pump by signing up the all the Cloud providers and the system integrators. Now that they have all of this in place, they can really get cranking.
    c) the professional visualization business has been a slow grower for a while with the past with CAGR over the past 3 fiscal years (2015 - 2018) at 5.8% growth. I think that their RTX (real-time ray tracing) technology may well juice this segment’s growth.
    d) Jetson is for devices at the edge. This area hasn’t really stared taking off yet. When it does, I think it will be bigger than data center business.
    e) The automotive business line is about 1/10th the size of the gaming business. The automotive is mostly infotainment. Soon (in a few years but probably well before 6 years from now) the autonomous automotive revenue will kick in for NVDA.

  2. Yes, you are correct that if the growth rate slows then the P/E will probably get compressed. This would contribute to a compression to the valuation.

  3. However, if revenue is growing at 45% then earnings will grow even faster. The E part of the P/E would work to offset the multiple compression. So how much has earnings been growing the past 5 quarters when revenue was growing at 45%? The answer is 83% (that’s the average 1 year growth rate over the past 5 quarters). So can this rate continue if revenue continues to grow at 45%?

Now for the calculations: TTM EPS is $4.91 and the TTM P/E is currently 45. If we grow the earnings for 6 years at 83% then we get TTM EPS of $184. If we compress the multiple from 45 to 20 then we get a share price of $3688 which is 16.7x of today’s price of $221.05.

This may seem a bit outrageous but we will see what happens…

Chris

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“But it’s the software that’s killing everyone.” He notes even Nervana’s founders initially built their technology by testing on Nvidia GPUs, which to Mosesmann is a sign of the pre-eminence of CUDA. "The ecosystem matters at this stage” in A.I.’s evolution, he says.”

That is a prototypical Geoffrey Moore Gorilla, just as Intel, Microsoft, Oracle, ARM, Apple, and a select few others were. They build and own an open but proprietary architecture that an entire industry standardizes on.

Apple is a bit different as they are more closed than the rest, but they have managed to make it open with IOS, and the rise of the browser vs. the OS has made Apple laptops more accessible, thus the superior stability of their OS could start to succeed and gain large chunks of marketshare against Microsoft that was impossible prior to browser and mobile changing the computing paradigm.

Here we have GPUs changing the computing paradigm. As Nvidia states, the more GPUs you buy the more you save, precisely because GPUs are so much more efficiently per processing unit. The CPU is still necessary, but int he data center, the more concentrated the GPUs via the CPU the more efficient the system.

GORILLA. I said it last year at less than half the price (and yes, a good chunk of the only 3 stocks I held at the time, then to 2, now to X) and it is even more true now.

Prognostication is about spotting patterns. This is a rare pattern. It is though.

In regard to future valuations, 45% earnings growth over 6 years is 9x. I think that is aggressive enough. And yes, that indeed could happen with ray tracing and edge computing to go along with the data center.

And as the article you linked to states, they are building complete systems, with switches (Arista) and data storage (PSTG) (of course they will work with anyone, but that is their current partners with their state of the art) and as the article also mentions, perhaps 6 years ago GPUs would not be considered the ideal solution for AI, but who cares. Neither was Windows, nor x86, but they set the standard.

NVDA is going to have a lot of market volatility. Cryptocurrency is rocking their share price far, far, far, far, more than it is so worth. But there goes the markets passions. Ignore it, this volatility, remember where this company is going as they hold the winning worldwide standard for the key enabling technology for the rest of many of our lifetimes (albeit may be quite a long time for me :wink: unexplored territory and what not) or at least, if not that, the next decade or two.

Sure, sure quantum computing, other breakthroughs. Not this decade, won’t take over next decade, maybe the following decade it may be a threat.

When you are the proprietary owner of the worldwide technological system of the largest technology paradigm in the history of the world (as it will be larger than just the CPU and the laptop) your long-term investment risk is such that you can ignore volatility and panic.

The issue becomes, not that Nvidia will be a superior investment over the next 6 years, but whether or not there will be even better investments. And yes, yes there will be, of course.

But the challenge is, as it always is, finding these investment systematically instead of just lucking in on and them. And this we have done on Saul’s board and NPI board quite well.

We don’t buy venture capital, we don’t buy vision, we buy into actually real world success stories, with market leading or market innovating companies, and then we make adjustments as necessary.

Nvidia is one that an adjustment will not be made. It simply is a long term winner.

Have I been emphatic enough ;). Oh don’t shoot me.

Tinker

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