Unraveled: “Warren Buffett’s Worst Nightmare” pitch from the Motley Fool

Opening up an excerpt from an old Friday File, solving a Fool teaser about driverless cars that's still in heavy rotation

By Travis Johnson, Stock Gumshoe, October 27, 2014

We’ve had many questions from readers about this teaser spiel from the Motley Fool Stock Advisor letter, so we’re republishing an excerpt of the Friday File in which we solved that teaser.

What follows originally appeared as a part of the Friday File on May 9, it has not been updated or revised — the stock teased by the Fools in this piece has had some ups and downs but is within a few cents of where it traded on that day.

—-originally published 5/9/14—-

The Motley Fool is pitching this “Buffett’s worst nightmare” stock in order to get subscribers to David and Tom Gardner’s Stock Advisor newsletter, and they open the ad this way:

“What happens when the perfect business model sustains a direct hit from the brightest minds at one of Silicon Valley’s most innovative firms?

“Tough to say exactly. But here’s what experts DO anticipate…

  • CNBC predicts this burgeoning industry will be the ‘new battleground for tech companies.’
  • Forbes magazine estimates it will soon generate $2 trillion a year in sales and ‘even more market cap.’
  • KPMG advises we’re “on the cusp of revolutionary change” coming much ‘sooner than you think.'”

What’s that all about? The death of the auto insurance industry — which they tease is coming our way, sooner than you think, because of the advent of self-driving cars. Auto insurance is, of course, one of the major cash-gushing indexes owned by Berkshire Hathaway (BRK-B), primarily because they bought GEICO several decades ago and have poured as much money as they can find into marketing to grow that cash machine.

And no, not even the Motley Fool ad says that this will not be enough to seriously derail Berkshire specifically — but saying that something is Buffett’s “worst nightmare” does catch your attention and get you to read the ad, no?

Here’s some more in their words:

“An emerging technology from within the heart of Silicon Valley has the potential to destroy GEICO’s business as we know it.

“PricewaterhouseCoopers says this technology will ‘significantly disrupt the traditional auto insurance industry.’

“Renowned tech author Chunka Mui admitted in a speech to the Council on Foreign Relations: ‘The immediate losers are the people who depend on accidents for their businesses.’

“Even a former exec at Allstate acknowledges that, over the long term, ‘car insurance goes away.’

“Why? Because self-driving cars are moving from the realm of science fiction into reality.”

Self-driving cars are famously a big research project at Google, but Stock Advisor isn’t touting GOOG today — they’re teasing a company that builds the guts that can make a normal-looking, “real” self-driving car (without Google’s huge hardware package on the roof) a reality. Here’s more from the pitch:

“But here’s the kicker (and the real reason I’m writing you today)… as a gathering of tech leaders in San Jose, California at the end of March made certain (a meeting that received almost no media coverage!)… one shocking company stands at the forefront of taking this technology mainstream.

“This company is pursuing partnerships with the biggest names in the auto industry. It’s investing nearly one-third of its revenue into R&D to ensure its hardware is the hands-down favorite among automakers.

“And its CEO has been on a whirlwind tour both through the tech world (including addressing a ‘jam-packed’ room at January’s Consumer Electronics Show) and in closed-door meetings with auto execs — explaining why its hardware is capable TODAY of taking self-driving cars ‘from the realm of research into the mass market.'”

How about some more clues for us?

“You see, many stock pickers will try to pick the winning car manufacturer. Others will get sidetracked by fancy in-car technology like Apple’s CarPlay or GM’s built-in Wi-Fi.

“But the technology I’m sharing with you today has much greater potential….

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“the tricky part about programming a self-driving car isn’t teaching a computer when to turn… or coding a camera to detect the speed limit.

It’s that — with all these inputs — these cars are ‘data guzzlers,’ as The Wall Street Journal recently put it. TRILLIONS of bytes of data are constantly pouring in, changing in real time, and requiring rapid responses.”

Then the really specific clues for our Thinkolator come in the description of this company’s recent presentation:

“The CEO of one of Silicon Valley’s most well-respected companies was giving the keynote address.

“You probably wouldn’t recognize him by name. After all, he’s not really the Steve Jobs — or even Tim Cook — type. He’s content running a behind-the-scenes hardware company that doesn’t usually make headlines.

“But as he was sharing his company’s latest advancements, he held the audience in the palm of his hands.

“After an hour and a half, the CEO throws a curveball…

“And introduces the head of product development from one of the world’s elite automakers.

“Together, they walk the audience through a video explaining what the two companies are working on — showing how sensors map out a virtual landscape that allows a car to determine where it should travel.

“Then the automaker VP says, ‘I brought something with me…’

“All eyes dart stage right as a sleek, silver sedan slowly drives toward them… and smoothly parks diagonally next to the two men.

“They go to open the driver-side door… no one is there!

“They walk around the side, coming to the trunk. Opening it up, they reveal the driver… by holding up the central CPU ‘manning’ the car (roughly the size of a notebook, it fits snugly off to one side.)

“The rep from the automaker then explains that the critical component powering the CPU is this tech company’s newest mobile processor.”

More on that key processor?

“The tech company’s CEO concedes that developing this processor was the ‘most ambitious project we’ve ever worked on.’ And that it’s ‘impossibly advanced.’

“A press release also explained that this processor provides ’10 times the computing power of previous mobile processors without consuming additional energy.’ And that it’s the same level of technology ‘that powers the world’s 10 most energy-efficient supercomputers.’

“Gary Vasilach, founding editor of Automotive Design & Production, one of the leading publications for automotive engineers, stood in awe, later writing that, ‘with four processors per car, a two-car garage would have as much computing power as the $120 million Blue Mountain supercomputer installed at the Los Alamos National Laboratory in 1998.’

“And that’s where many experts have this company incorrectly pegged — and why most investors haven’t caught on to this tech company’s true potential…

“Since the company has developed a ‘mobile processor,’ some analysts argue that the company is behind the times — that it doesn’t have a strong selling point with smartphone manufacturers.”

And this chip is already in use, apparently…

“Then consider that this company already has their products in more than 4.5 million cars (and growing!) — in everything from Porsches and Maseratis to Volkswagens and Hyundais… even Teslas!”

So who is it? Thinkolator sez that they’re teasing… Nvidia (NVDA), a $10 billion, dividend-paying semiconductor company that I don’t think I’ve ever taken a serious look at. They are priced at a premium to the market right now, in part because of some rapid earnings growth recently and because they’ve had nice upside surprises in their quarterly earnings three times in the past year, but analysts (other than the Gardner brothers, apparently) are pretty skeptical about growth — they’re penciling in just 7% earnings growth for the next five years.

The company has a great balance sheet, plenty of cash, a slowly growing dividend — and the Fool has been teasing it for about two weeks now that I’ve seen, during which the stock hasn’t moved much. But then they released earnings yesterday, and the stock is down about 3% as I type. You can see the conference call transcript from last night here.

Their latest processor that’s being used in automotive and high-end mobile devices, the Tegra K1, is what’s being teased here. I know almost nothing about it, but there’s another story about that March presentation here if you’re curious. They are gradually getting out of low-end graphics chips that carry lower margins, it appears, and aiming for the data-intensive operations — of which automotive is just one. They’ve been aiming to get their sales to the automotive segment up to a billion dollars, which would be about a quarter of their total revenue from the last year, so it should be substantial but it won’t be the single “driver” of the stock.

When will the autonomous, “self-driving” cars become a reality? Some folks are predicting that they’ll be common on the road within five years, but it’s awfully hard to predict adoption – and even if cars aren’t really “self-driving” in this decade, they are becoming smarter and smarter and requiring more and more data processing capacity, we’re told. The Foolies say that…

“The big money is made somewhere between widespread popular disbelief and when the technology is found in every home .

“Like with Microsoft in ’86… before the home PC revolution took off (and handed early investors a 56,000%+ gain).

“Then with AOL in ’94… before everyone and their grandma were using those shiny ‘free Internet’ CDs (handing early investors a 20,000%+ gain).”

So… interesting stock, you can’t really call it a cheap stock at this point, and they’re in an extremely competitive market, but it looks like David Gardner is thinking outside the box a bit and envisioning a much faster ramp-up of automotive processing power, and that NVDA will lead that charge. Seems possible but is certainly not guaranteed — it’s a growth stock, with a growth valuation, in a market where they’re mostly competing against large companies that are cheaper (like Intel and Qualcomm).

I’m not running out to buy the stock, particularly since I really have never looked at them before today, but it’s an interesting story. If you’d like a negative spin on NVDA for balance, there’s an interesting analysis (heavily debated) at SeekingAlpha here from the time of their last earnings release. Yesterday’s earnings also got mistakenly leaked earlier in the week, and a Fool writer wrote that they “looked great” at the time.

———

Back to October now … you can see the current version of this ad, which seems mostly unchanged to me, right here. There have been no really dramatic changes to their analyst estimates in the last 90 days, nor anything that stands out like insider buying or big deals, and they have been relatively boring during the latest market turmoil (which is probably a good thing). So are you interested in NVDA at a three-year high, agree with Warren Buffett when he says that self-driving cars might be a “real threat” to auto insurance companies? Think their connection to the wired car and the future driverless car will spur NVDA higher? Let us know with a comment below.

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