Mad Hedge Technology Alerts!
Long term readers of this letter know too well that after tripling from my initial forecast of $68 a share, that the shares of NVIDIA would double again.
After listening to their Q4 earnings call, I now have to confess that I was wrong my in assessment.
It now looks like NVIDIA shares will triple off of the recent $180 low.
From what I heard, the call was nothing less than amazing.
When considering companies limited by imagination, the last one I would anoint is Nvidia (NVDA).
I have been pounding the table for years, pleading with readers to drop everything and get into this battering ram of a stock.
If you didn't, well, you aren't buying at the bottom, but the future potential for Nvidia cannot be understated. Nvidia stands atop a parapet, scoffing at its enemies who simply cannot compare.
Its superior strategic position in GPU (graphics processing units) chips has forced the tech community to adopt its platform as the building blocks of A.I., machine learning, data center, and autonomous car technology.
In fact, Nvidia has only scratched the surface of its potential. The sustained growth story is not only intact but accelerating at a rapid clip.
The first chapter of Nvdia's rise to glory was on the back of e-gaming and the subsequent demand for their GPUs. The most talented gamers require the superior GPU's for faster processing speeds and crisper visuals that aid playing levels.
Casual gamers seem to upgrade their GPU's as well, since many of these participants cut their teeth jostling with their online counterparts 10 hours/day.
The main beneficiary of the GPU gaming upgrade boom is the model NVIDIA Pascal. This chip has the world's most advanced gaming GPU architecture, delivering truly game-changing performance, innovative technologies, and immersive, next-gen virtual reality.
Offering scintillating gameplay, it's a rung up in the gaming world. Additionally, the companies that manufacture gaming consoles are part and parcel in this GPU game of thrones. Sales of the Nintendo Switch provided a boost to Nvidia's Tegra processor revenue, tallying up to $450 million, up 75% YOY.
On a stand-alone basis, Nvidia is knocking the ball out of the park in terms of a pure gaming stock, but it is so much more than that. Nvidia IS the future. This was all apparent in last week's earnings call, which I shall outline below.
Data Centers
Revenue of $606 million was up a staggering 105% YOY, and up 20% QOQ. This over performance reflected strong adoption of Tesla V100 GPUs based on the Volta architecture, which began shipping in Q2 and continued to solidify in Q3 and Q4 2017.
V100's are present in every mainstream computer made by every major company, and have been chosen by every major cloud provider to deliver A.I. and high-performance computing.
Cloud customers adopting the V100 include Alibaba, Amazon Web Services, Baidu, Google, IBM, Microsoft Azure, Oracle and Samsung.
Nvidia perpetuates leadership in the AI training markets where their GPU's remain the platform of choice for training and machine learning networks. Any well-known company looking to A.I. functionality in the data center space relies on Nvidia to carry the load.
Nvidia posted a growing traction in the A.I. inference market where NVIDIA's platform can improve performance and efficiency by many degrees of magnitude over CPU's.
"Inference?" is the technology that puts sophisticated neural networks, trained on powerful GPUs, into use, solving problems for everyday users. Nvidia considers A.I. inference as a cogent new opportunity for the data center GPUs.
Nvidia is also gaining influence for A.I. in a growing number of vertical industries such as transportation, energy, manufacturing, smart cities, and healthcare.
The most poignant data center technology innovation was Tensor Core, a unique feature of the new Volta GPU Architecture. This technology alone can successfully complete rapid deep learning, and it officially increases the throughput of deep learning by 800%.
Autonomous Driving
Nvidia flaunted their leading position in autonomous vehicles with several salient landmarks and new partnerships. A.I. self-driving cars are trending towards moving from deployment to production.
Jensen Huang, the genius who is the CEO of Nvidia, announced that DRIVE Xavier, the world's first autonomous machine processor, will be available for the first time this quarter with more than 9 billion transistors.
DRIVE Xavier is the most complicated system Nvidia has ever delivered to customers. Recently trotted out, NVIDIA Drive is the world's first functional A.I. self-driving platform, enabling automakers to create autonomous vehicles they can operate safely.
This is a necessary component to prove its technology is ready for mass market. Several dynamic collaborations have begun with Uber, which has integrated A.I. video technology for its fleet of self-driving cars and freight trucks.
Production vehicles utilizing NVIDIA drive technology include vehicles from Chariot. Chariot is a privately-owned commuter shuttle service that is currently in the process of being acquired by Ford.
The company's mobile-phone application allows passengers to hop on a shuttle between home and work during commuting hours. Chariot currently operates in several neighborhoods in Silicon Valley and plans to swiftly expand to other locations around the United States. The Chariot fleet expects to be fully functional and possess automation capability by 2020.
Over 320 firms are now using the NVIDIA Drive platform, up 50% YOY, including almost every relevant car maker, truck maker, robo-taxi company, mapping company, car parts manufacturer and start-up in the autonomous vehicle ecosphere.
Nvidia has strategically placed itself on the front line hoping to expedite the roll out of this technology in the form of a massive fleet, servicing the individual. The obsolescence of human drivers is closer than you think.
Autonomous driving is the most significant paradigm shift in the history of the automotive industry. In total, transportation is a $10 trillion industry and I am not exaggerating when I say this will completely reshape our daily lives.
Vehicles will be fully or partly autonomous, depending on the entity. The potential of this market is massive.
The imminent monetization process will commence in 2019 and 2020, but if I had to bet money, I would say widespread profiteering will not occur until 2022.
The first goal is to train a network of autonomous driving capabilities, and this will be aided by creating a platform named NVIDIA GTX that grants everybody the chance to train a neural network promptly.
The inherent development of the A.I. requires top end GPU's, and Nvidia harvests a good portion of the spoils.
The second phase would be development platforms for the cars themselves and all these tasks will be executed by Nvidia Xavier SoC.
A system-on-a-chip (SoC) is a microchip with all the necessary electronic circuits and parts for a given system, such as a smartphone or wearable computer, on a single integrated circuit (IC).
Xavier is the most complex SoC that humankind has ever invented. All previous NVIDIA DRIVE software development carries over and runs with this consolidated architecture.
The prices for Nvidia GPU's split because the mix of solutions are unique. Autonomous vehicles that still have physical drivers will fetch a price between $500 to $1,000 per GPU.
Autonomous vehicles without drivers will command a price of $2,000-$3,000 per GPU. In general, the industry will see large-scale deployment starting FY 2018.
Practically every car produced in 2022 and beyond will have autonomous driving capabilities, requiring copious amounts of Nvidia GPU chips.
Huang repeatedly complains that Nvidia cannot keep up with the insane demand of these new technologies. There will be a persistent GPU shortage for the foreseeable future.
What does the future of AI behold aside from the imminent sensations of autonomous vehicles?
At a basic level, A.I. can be used for many things, such as improving images. For instance, you could reconstruct a photograph using A.I.. You could correct blemishes or parts of the image that haven't been rendered yet. A.I. would be used to fill in the holes, predict the future, and render results.
Let's take it one step further.
Extrapolating this concept to broader designs of everything, say cars, A.I. will be used to generate their designs in the future.
You could draw the first few preliminary scribbles of a car design and based on the inventory, safety, physics, consumer demands and other crucial inputs, the A.I. technology would complete the remaining 90% of the design.
This new type of design technology is called generative design and will revolutionize the way people do business.
My prognosis in the future of developing software is a world where computers can write their own software and this software will be so dense and complex that no human can replicate the task.
Essentially, we will be coaching up data to teach software how to write it's own software through machine learning. And imagine the new business applications introduced by this potential software!
Did I mention that Nvidia is also returning $1.25 billion to shareholders in FY 2019 and receiving another tailwind of high single digit growth in bitcoin mining?
Of course, all of that pales in comparison to the potential big picture profits Nvidia could realize. Jensen Huang has told investors that he expects A.I. to be a $10 billion/year business and autonomous technology to be a $40 billion/year business.
Remember that their most stable segment now is e-gaming GPUs which are only a paltry $3 billion/year in total revenue.
Nvidia could easily triple its business without fulfilling its revenue claims by just partially reaping the fruits of their labor from the A.I., data center, and autonomous vehicle industries. To visit their website please click here.
Mad Hedge Technology Letter
February 12, 2018
Fiat Lux
Featured Trade:
(DON'T FALL INTO THE SNAP TRAP),
(SNAP), (FB), (GOOGL), (AMZN)
It is often said that the best performance of a share price is triggered when the fundamentals go from awful to merely terrible.
That has certainly been the case for long suffering SNAP (SNAP), which delivered one of the best performing stocks in an otherwise disastrous market last week, up an amazing 37%.
You can thank this ballistic move due to a surprise report delivering earnings of 12 cents a share, the first ever for the company. The company added 9 million daily users, taking their total to 187 million. The number of adds place rose by 400%.
So much for the silver lining. Now for the cloud.
SNAP is a minnow attempting to swim in an ocean filled with sharks and whales, like Alphabet (GOOGL), and Amazon (AMZN).
Ad prices fell by 70%. SNAP is expected to continue to lose money through 2021. What's worse, Facebook (FB) is about to eat their lunch, appetizer, entree, and dessert in all.
SNAP was one of the preeminent IPO disasters of 2017. It launched in March at $17 and then soared 44% on the first day to $29. It then collapsed to a low of $11.40, off a heartbreaking 60.68%. It was a classic case of investment banker incompetence, greed, and mispricing.
Snapchat, wildly popular with adolescents and young adults, is a social networking platform that took off when it debuted on NYSE in March 2017.
Based on photos and videos clips the user can "snap" and send to other users, only to disappear after viewing, this innovation allowed the young people of the world access to the ultimate social media dream: a quick and convenient way of documenting every waking moment of their lives (generally through the smartphone app).
Sadly, the exuberance was short lived.
Snapchat was the most accurate description of a technology laggard in 2017.
Imitation is the sincerest form of flattery and understanding the machinations at a technical level with give us more color.
The addition of a new feature, giving users the option of adding snaps to their "story", a chronological account of their day vanishing in 24 hours, seemingly caught the attention of other big players who were taking careful tabs on this progress.
Facebook (FB) seamlessly cloned the same core features responsible for Snapchat's (or Snap Inc.) rise to fame.
Modern-day tech is made up of unique networks that are often difficult to build; once built and scaled efficiently, however, the reach cannot be replicated.
Gaining eyeballs is what feeds Snap's success. As Facebook and it's daughter companies systematically mimic its best features, user preference to stay within the familiar Facebook ecosystem, rather than venturing into the unknown, has become more evident.
Facebook's Instagram will continue to position itself accordingly as competitors in the tech space start to cannibalize each other for user attention. This is definitely not a "rising tide lifts all boats" scenario. There are winners and losers in this game, and Snap's direct rivalry with Instagram doesn't make its prospects look good.
2018 marks a key year for Facebook; protecting the core user experience will be vital for harvesting user trust in the arena. This natural evolution has forced Facebook CEO Mark Zuckerberg to prioritize personal networks over brute commerce.
We can expect a short term hit to ad load, but an offset by improved quality user experience in the long term. Spinning off new ideas, fluid integration, and brisk execution illustrates the ability of Facebook management teams to adapt and reload.
Granted, Snapchat had a late start, a factor partly responsible for their showing up to a shootout with a butter knife. All the same, the daunting Instagram challenge seems grim because the digital ad duopoly is hard to disrupt and if their DAU growth is already this unimpressive then watch out below!
Tech titans plow a substantial portion of their cash back into developing their user experience, which is critical to engaging active users, stabilizing ad pricing, and increasing ad load. In short, it's an arduous task for Snap to compete with Instagram's unlimited resources.
M&A has taken hold in the tech world, with the behemoths identifying companies that would exhibit synergies fitting into their ecosystems; cash is certainly not a problem.
Examples are rampant: Amazon's purchase of Whole Foods, Facebook's purchase of Oculus Rift, etc. In cases where Goliath doesn't buy David out, he crushes him under relentless competition.
This means that even if Snap improves its user experience, Facebook can mobilize its developers to replicate these functions almost instantaneously, throttling any hope of making a comeback by moving in a different direction.
Snapchat is in the midst of rolling out a major redesign of its platform to commercialize their product, but does it matter? Facebook will simply take the best parts of the new redesign and integrate it into Instagram as free innovation.
Nor does it help that many companies felt it unnecessary to buy ads on Snap when Facebook and Instagram have more user engagement follow through and over 2 billion active daily users.
That's the game today: have the technology to imitate competitors and trap users inside an ecosystem; hyper-improve the experience, and any and every click of the mouse benefits the bottom line through data analytics, ads, and sales.
As the tech space has matured, the juggernauts have realized that speed and agility will help them offer a better user experience, regardless of where the innovation comes from.
Inevitably, Facebook ad pricing will rise due to less inventory, and this short squeeze will drive growth in earnings. Facebook ad offerings are, in effect, an auction and the price can be bid up. Any company that cannot afford Facebook's rates can logically migrate to Instagram where the pricing is a level lower and geared to a younger audience with lower spending power.
Simple supply and demand will exacerbate competition for these ads like the San Jose housing market. At the same time, it's unsurprising that the Snap revenue estimates have been guided lower and lower and actually there is no guidance for Q1 2018 while Facebook's revenue accelerates. This is not coincidence. Don't forget that a stock is worthy of your undivided attention if it sequentially beats earnings and raises revenue consistently like Nvidia (NVDA).
Snap catastrophically fails at the two most important metrics for tech growth companies: daily active user growth and accelerated revenue growth. Q4 2017 was a transition quarter but the odds are asymmetrically stacked against them.
The torrid equity strength in the first month of the year failed to include Snap, while interest rate-sensitive stocks and large tech stocks skyrocketed. Moreover, Snap's daily active user growth has flattened like a pancake to 2.9% in Q3 2017 and Q4 showed anemic increases allowing the Mad Hedge Fund Trader to paint Snap as transitional at best.
With marginal stocks typically being victim to the steepest and swiftest declines, expect that if the market rolls over and consolidates further, Snap may likely be bludgeoned into nonexistence.
For Facebook, on the other hand, the only downside is they may need to start coming up with their own innovations.
Avoid SNAP. If you own SNAP get rid of it, and thank the heavens it spiked on earnings which gave traders a perfect exit point for Snap. After the broad market correction has run its course, Snap will not be the torchbearer of the next gap up. If you are looking for a Snap like replacement in your portfolio then Twitter (TWTR) would fit like a glove.
