What’s Moe Zulfiqar pitching as “The one tech stock to buy and never sell?” I’ve seen a couple versions of this teaser ad come rolling into Gumshoe HQ over the past week or so, and it’s time for a quick Thinkolator answer for you…
The ad is peddling subscriptions to America’s Redemption, one of the newsletters from Lombardi publishing (Zulfiqar is apparently editor of this letter, now, last time we looked at this, several years back, it was Mitchell Clark — and he was peddling investment “prophesies” from the Bible), and it’s one of those “ramp up” subscription deals — you pay $5 up front, and then if you don’t cancel they charge you another $92.50 for a six month membership, and if you still don’t cancel they start renewing you at $295/year.
So, assuming you don’t want to commit to all that in the service of learning about this “secret” tech stock, let’s get you some answers… then, if you feel like it, you can consider a subscription to America’s Redemption if you feel like it, with no pressure and in the full light of day. OK?
Here’s a taste of the ad, including pretty much all the clues we need:
“… owning stock in this company is like owning Apple stock back in 2004… before it surged from $2 a share to over $150 today. It has the potential to deliver me massive returns, just like it already has for other investors, for these four specific reasons:
“The company possesses several “must-have” technologies car makers need (related to driver-assist technologies) that could make fatal car accidents a thing of the past.
“Gross profits have jumped from $2.8 billion in 2015 to $5.8 billion in 2017.
“The company has $4 billion in cash and equivalents in the bank….
“The stock has more than DOUBLED in value every year for the last three years alone! If I had invested just $500 per month in this tech stock beginning in 2003, I’d be sitting on more than $1.5 million today—and it keeps going up!”
OK, so that “if I had invested $500 per month” is a new one — we usually see pitches about “if you had invested X years ago, you’d be rich as Y,” not “invest every month” teases. And I needn’t tell you that anyone can backtest and identify which companies would have been the best ones to hold for the past 15 years, of course — predicting the past is pretty easy, predicting the future is where it gets hard.
If you’re curious about the math, by the way, that’s a total investment of $90,000 over those 15 years to get to your $1.5 million.
How about the rest? Well, they said that this special report went out about a week ago, so it’s still quite current, and this is obviously a pretty big company — there are only about 50 tech stocks that have gross profit over $5 billion a year. Add in the cash balance and the fact that it has doubled a few times already, and you’re left with only one answer… this is, sez the Thinkolator, our old friend NVIDIA (NVDA).
And yes, I own shares of this one, too. It’s been the true darling of tech stocks over the past several years, and for much of that time it has been the single best performing stock in the S&P 500. So no, you don’t need a newsletter to tell you about this ‘secret’ stock, it’s probably one of the most widely covered stocks outside of the FANG names… though you might need a strong stomach, or some convincing from your friendly neighborhood newsletter writer, to buy shares at current prices.
I added (very) slightly to my NVDA holdings recently, at prices near $225, but it’s a hard valuation at which to commit much capital (my cost basis is about $125, which makes it emotionally easier to ride the ups and downs)… particularly when we’re about a week away from NVDA’s next quarterly earnings release. Shares have bounced around quite a bit this year after a huge multi-year run, so you needn’t decide today — take your time, research, figure out if it’s a good risk/reward balance for you, personally… the stock has bounced up and down between $200-250 so far this year
But man, it is quite a company. NVIDIA has positioned itself at the core of some of the most important trends in technology — artificial intelligence, virtual reality, autonomous vehicles, cloud processing and increasingly “smarter” data centers, and, of course, their bread and butter business of graphics processing for video games. They have turned a brilliant insight a few decades ago, that graphics would be the heart of computing, into a leadership position in many of the most demanding end markets in the chip world.
I bought a few shares to add to my holdings mostly because I get a little “old time religion” feeling whenever I review NVIDIA’s materials — I love management’s passion for this market, and their focus on dominating and growing the market with constant R&D. NVIDIA has grown their R&D spending at an accelerating rate, up 20% over the past five years, at the same time that their only real “almost pure play” rival in GPUs, Advanced Micro Devices (AMD), has been cutting R&D spending. That might not be entirely fair — AMD, NVDA and Intel all spend fairly similar percentage of their sales on R&D, in the 20% neighborhood, and NVDA’s percentage has come down pretty sharply in recent years… it’s just that NVDA’s sales have grown very fast to support that spend and let the total sum grow nicely.
That’s no guarantee of success, of course — and the bigger threat is certainly that new purpose-built chip designs will cut into particular markets (like artificial intelligence, where better technologies may well rise up), or that true giants like Intel will be able to take some share away (Intel has plenty of other concerns on its plate as well, but does spend about 5X as much as NVDA on R&D)… but so far NVIDIA has been more than holding its own, and the stock price reflects that.
Which is where a value investor starts to feel a little nauseated… NVDA trades at a trailing PE of about 46, with a dividend yield firmly in the “paltry” range at 0.27%. You can’t buy the stock based on trailing valuations or dividend or price to book value or any of those things that make you feel steady in an uncertain world… if you want to buy NVDA, you have to do so on faith that the growth will continue, and that NVIDIA will continue to drive innovation and build market share in their core markets. Currently, analysts estimate that they’ll earn $6.80 per share this year and $7.90 next year, with 2020 revenue expected to be more than 40% above the 2018 level.
That’s not Facebook-level growth, but it’s still serious growth, particularly for a company that’s already fairly large (NVDA is a $135 billion company today, with close to $10 billion in revenue). If that growth materializes, that means you’d be buying today at 32X current year earnings, and 28X next year’s earnings. That’s reasonable for a company growing earnings at this pace, but it stops being reasonable very, very quickly if that growth disappoints even a little bit. Quite a few companies this year have already reported great results and still seen their share price drop, so even a strong quarter from NVIDIA when they report on May 10 is no guarantee of a higher share price a month from now.
There are plenty of other risks, to be sure — demand from cryptocurrency miners has been a meaningful part of demand for GPUs over the past couple years (no one is exactly sure how much, they’re mostly buying “retail” GPUs just like the hardcore video gamers do), so if that collapses then that would hurt the income at least a bit, and might hurt the “story” of the stock more (NVDA has been pitched as a “back door” type of cryptocurrency investment quite a bit over the past year, so that’s part of the story in the minds of many investors).
And video gaming continues to be strong, both the core NVIDIA market of high-end desktop gamers and the consoles (NVDA is in the new Nintendo Switch, it’s not in the Xbox or Playstation), so that core market has definitely done a lot to keep income flowing at NVIDIA… but I have no way to predict if or when that might slow — it seems to have surprised on the positive side, at least from the average analysts’ perspective, for the past several years. And if you know someone who’s addicted to playing Fortnite, or have seen the huge crowds gathering in arenas (and virtually on YouTube) to watch the best video gamers play, you know this is a business that “over 40” folks routinely underestimate.
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The big growth areas are the high-end GPUs used in data centers and in autonomous vehicles, so NVIDIA has sometimes also been pressured recently by the Tesla bad news parade as well — both because TSLA has talked about developing their own chips, and because Tesla sales volume has not reached the expected levels. That’s not the only car company using NVIDIA GPUs for autonomous driving and “learning,” but it’s at least a headline risk.
So the growth has been remarkable, the expected growth is still remarkable, and NVIDIA is in a leadership position in most of their businesses — which I think gives them a strong future, because the developers today who are designing and coming up with the next great artificial intelligence systems have no reason to build around any platform other than NVIDIA — they have, to some extent, a “network effect” going that reinforces their market leadership (the best people user their platform, which makes their systems better and critical to more products, which makes more people use them).
It’s not a guarantee of future success, for sure, especially when you’re paying a lot for that future potential at a time when the future is likely to become more expensive than it has been in the recent past (low interest rates mean that $1 today is only worth a little more than $1 next year… if you invest it risk free, it only turns into $1.01 or whatever. If those “risk free” rates rise considerably, though the “discount rate” in the models changes and becomes more meaningful pretty quickly, and “earnings now” increase in value, at least theoretically, relative to “earnings in the future”).
So there you have it — not at all a secret stock, and perhaps one of the more-teased stocks we’ve ever written about, it has been embraced by just about any growth stock investor you can name, and it is a company that has a really strong and compelling business. Unfortunately, it’s also priced as if it has a really strong and compelling business. This is not like buying Apple in 2004, I expect, it’s already quite large — though perhaps, if we’re lucky, it will be like buying Apple in 2012.
That comparison doesn’t mean anything, of course, the two companies are not terribly similar, but Apple was an $8 billion company back in 2004, trading at only about 1.2X sales because they were just a maker of niche computers and the still-new iPod, well before the company completely transformed in the wake of the iPhone several years later. If NVIDIA were to post gains over the next 15 years like Apple has over the past 15, that would bring them to a market cap of about $10 trillion.
Don’t count on it, NVIDIA has become a very strong company (and growth stock), and may turn out to be a long-term winner, and I do have a meaningful position, but looking out more than a couple years in this extremely competitive business quickly gets you drooling and dreaming, and that doesn’t do anyone any good.
Have a take on NVIDIA, or on what you might think is a better “tech stock to buy and never sell?” Let us know with a comment below. And, of course, if you’ve ever subscribed to Lombardi’s America’s Redemption, Gumshoe readers would like to know what you thought — worth it? Not worthy? Click here to let us know.
Disclosure: I own shares of NVIDIA, Apple, and Facebook, and call options on Intel. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.