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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just click here...“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.
I myself build computers and I use NVIDIA but as I see it everything has a glitch. as I see it this thing with self driving cars are use as a way of control. we have a new web call 3.0 and it’s is going to make a changes in what we do. these new chips that they are making can go bad too. the constant heating and cooling will cause defects and since we are in a cyber war of hacking into computers and taking control and us for tracking not good. when you can hack into Morgan & Chase Bank and into Federal Reserve. I am wondering how long before we won’t be able to think for ourselves.
things are going to start moving really fast, Spacex, virgin galactic, Amazons Bezos had a secret space company for like 10 years now. A couple of Electric Utilities have said already that they are switching to roof solar facilitation because there is no future in Power Plants/Distribution…rooftop solar too disrupting. Mr Buffet has said before he doesn’t do technology companies because he doesn’t understand tech, well, his railroad main client is coal and no coal power plants no coal needed….he is screws…every power plant (600) in the us needs a trainload of coal everyday……that doesn’t sound good for him does it ?
Maybe is time to retirement for somebody that does not understand technology.
Hello Travis. You say NVDA is a $20 billion company. Everywhere I look shows it to be $10 billion. You may want to make a correction, unless I’m missing something?
Great article! And interesting company.
LostOkie
Slip of the finger or brain, I guess, don’t remember which — thanks for the correction.
Prefer to give Travis a bit more credit…that $20 B company he was subconsciously (brain slip) referring to is SiriusXM. With all the currently unused satellite spectrum focused on streaming video or even full length features to all those non-drivers, even an hour commute doesn’t seem quite that terrible anymore! …and unlike NVDA, SIRI has no competition in sight!!!
Driverless cars never will be perfect. But, they already are far safer than cars with drivers. (October 2014).
Regarding Nvidia, IMO larger competitors will be a problem for them in the auto business. A faster processor is only a small part of the ecosystem. And a year later, the same chip is now a slower processor.
I think that, at some point, any increase in processor speed would not increase the functionality of the processor.
So after reading some of these comments, I went for a drive in my Porsche 911 through the country roads to my home. Are you telling me this, one of my great pleasures, will all be gone? Will Porsche, Maserati, Ferrari, etc. all go out of business, too?
Why would they? Manufacturers of luxurious, super-pricey mechanical watches make money hand over fist even though much-cheaper digital watches can be at least as precise. There will always be a market for eccentric luxury, and a touch of `retro` can help.
True, but many watch watchers are more interested in the accuracy of their watch than in its precision.
PASS!!! (in capital letters)
Only 42 years separate the accomplishments of Charles Lindbergh and Neil Armstrong. Truly impressive.
So what’s new here? We have millions of driverless cars already on the roads, although there is inevitably someone in the seat reserved for one. Maybe we should only give licenses to those who can drive, instead of every Tom, Dick and Harriet. But then Buffet wouldn’t make quite as much…
Driver-less cars could mean the following disruptions:
1. cheaper car insurance for cars with the driver-less feature – less revenue for insurance industry
2. fewer road accidents causing injury and premature deaths – less revenue for health industry and health insurance industry
3. you will need very little driver instruction to use one – less revenue for driver instruction industry
4. all you will need is the ability to enter a destination, so if you are high, drunk, having a baby, having a heart attack, blind or even want to sleep during the journey the cars technology will get you there. The level of difficulty would be similar to selecting TV channels on your smart TV – more revenue for entertainment industry
5. less fuel will be used as the cars will be driven optimally – less revenue for oil industry
6. maybe reduced congestion since cars will be selecting alternative routes real time – maybe less revenue for the road toll industry
7. assuming the driver-less car will be working in concert with all other driver-less cars in the vicinity, the wireless data connectivity requirements will be massive, whoever owns and operates the licenses for these wavelengths will be getting a lot of subscriptions – more revenue for wireless industry
8. less breakdowns, a driver-less car will organize the maintenance automatically and take itself for maintenance when your not using it, perhaps when your sleeping at night-time – less revenue for car rescue industry
There’s probably more disruptions..
Add another effect of driverless vehicles that we cannot and should not ignore, as it will have to be compensated by higher taxes and forced new job creation, which is getting harder and harder to bring about: The loss of transportation industry jobs, a huge employer. All bus, taxi and truck drivers will become obsolete. We know automation cannot and should not be stopped. But we need to go slower in introducing these technologies or force them to provide compensatory employment. We already have the proof that automation has destroyed too many jobs while NOT creating enough solid new ones in its place. That is the real reason we can’t improve employment figures for quality or at least solid jobs. At some point soon, the consumer won’t be able to buy the new technology because he/she can no longer work as a bank teller, travel agent, teacher, bookkeeper, taxi driver, truck driver and hundreds of other unglamorous but vital jobs. Also, expect carsharing to increase (and consequently multi-car businesses and families to decrease), as the car can at some point take you to work and come back to home base by itself to be used for further errands. We will have fewer parked cars and more on the roads, resulting in the need for more highways and fewer parking decks. Although control is a dirty word, we need to slow down the introduction of these new technologies so as not to collapse society into chaos. If that happens, a dangerous imbalance is created that can quickly lead to loss of hard-won freedoms and even war.
All your points are great! Less waste and greater efficiency is the ultimate goal here. Unburdening our industries and infrastructure will help us make great strides in progressing the technology to produce even greater efficiencies. Remember the law of supply and demand, less demand will drive lower prices in all of those industries you mentioned above.
Happy New year everyone!
So is Nvidia the company they are referring to in the video? Is Nvidia the company Buffett is losing sleep over*s*?
Yes
Do you think there is any correlation between Buffet and his railroad monopoly that hauls fracking oil from the Dakotas and Obama dragging his feet on the Pipeline … and Buffet making public statements that the Rich need to pay more taxes. Is Buffet working the govt for his own gain?
Every company works the government for it’s own gain. But no, I don’t think it’s a conspiracy to halt the pipeline for Buffett.
Millions of people in this country (U.S.) alone have only heard a little bit about Warren Buffet, but are putting pressure on the USG to not accommodate foreign companies who want to pipeline a nearly un-pipelineable product to US refineries to dirty US air with; mostly for consumption in non-US markets.
1. Believe me Google engineers are aware of these obvious points. They KNOW computers can fail, and they will design systems with that in mind.
2. The issue is not IF driverless cars can be safe, it’s WHEN, and at what cost. Planes have autopilots, but they cost a thousand times more than cars.
3. Driverless cars will first be used in industry and defense where there is no external liability. Widespread public use will take years. So by all means look at or buy Nvidia, but not because of driverless cars.
They say that in the near future a computer as smart as the human brain is feasible.
Think about it.
To all the neg feedback, It’s always difficult to know the best stock , we don’t know about unknown cutting edge research to address every problem, ( but bet it’s happening ) and all the start ups, its seems inevitable, with so many of the big players working on driver-less cars .
Yes there are a lot of problems right now, In my mind THERES no doubt it will prevail, it’s in its early stages and moving very fast. It will be a difficult technology to perfec, . YES –
All the best high- tech companies are moving fast. It’s undeniable.
I think Motley Fool was referring to Ambarella (AMBA) not Nvidia (NVDA). Nvidia seems to be a good chance of competing.
Imagine what driverless cars will do to Uber (and taxi services in general)! That may be the best short of all.
Read that Uber want to lose their drivers to new fleets of these.
Motley fool are just click-baters… they are usually so late to the punch… pushing 3D printing after those stocks were already jacked to the moon…
Here we have it again – how will you be targeting your stock picks when/if driver-less cars are sold out of EVERY car manufacturer, as the idea is already trying to emerge from the surface. So are you going to wait for the smartest Asian engineer in the world to issue shares of his own personal stock??? Or maybe you just buy stock in ALL CAR MANUFACTURERS?????? Elaborate or buzz off. Please just buzz off.
Has anyone given any thought to how cars will get software updates? What happens when your car is old technology? As we all know, a brand-new device is already an outdated device!! What about needing more memory as the control updates get distributed? I don’t see how this is sustainable on a mass level! The first roll-out where there’s only one version of the system is all fine. But again, we all know how often updates get pushed out! Just sayin’ !
That could be separate component with a separate stock ticker, just like tire manufacturers.
**Has anyone given any thought to how cars will get software updates?
-> I think they have. How do they get traffic updates?
**What happens when your car is old technology?
-> Same as when it’s old mechanically – replacement parts.
**As we all know, a brand-new device is already an outdated device!!
-> Same mechanically. Except the already old physical parts will still run for years – and then need parts and labour to swap out – whereas the software components – well they come from the sky as soon as they are available and will self-install.
**What about needing more memory as the control updates get distributed?
-> Memory is cheap and available at your nearest convenience store.
**I don’t see how this is sustainable on a mass level!
-> You really haven’t thought this through have you?
**The first roll-out where there’s only one version of the system is all fine.
**But again, we all know how often updates get pushed out! Just sayin’ !
-> I get nagged on a daily basis by Oracle/AVG/Bill Gates/Steve Jobs(RIP) et al pushing me updates. Just saying!
It seems like it was a good tip. Back in June 2014-Oct 2014 when you posted your article and update, NVDA was trading in the $18 range and it’s most recent close was $33.75, over an 85% increase in 18 months. Not bad.
True
Apple and Microsoft sell their own brands direct to the customer. Suppliers to the automotive market historically don’t enjoy the profit margins that Nvidia would need to be the next Apple or Microsoft.