It looks like we’ve got another marketing wave from Bonner & Partners coming, this time in service of Jeff Brown’s Near Future Report ($199/yr), and we’re teased about the massive riches available from the advancements in artificial intelligence.
And the promises are, of course, huge… here’s a bit of the spiel:
“Remember when Apple made national headlines last year for reaching the one trillion dollar mark?
“Well, I’m predicting a small group of stocks…
“Those that take advantage of this new technology here…
“Will create at least 15 times more wealth than Apple.”
Brown also uses that “world’s first trillionaire” phrase that pretty much every artificial intelligence teaser pitch has put to use — yes, Mark Cuban did say that a little over two years ago… the actual quote was that “the world’s first trillionaire will be an artificial intelligence entrepreneur,” so, sorry — if you were hoping to get there with a passive investment, I guess you’re out of luck.
But still, there’s a lot of room for success below that “trillionaire” level — so what is it that we’re being teased with today?
More from the ad:
“…. Wall Street has completely missed this story.
“That’s because the science that created yesterday’s biggest tech fortunes…
“For companies such as Apple, Intel, and IBM…
“Has been swept aside.
“And replaced by new technology that’s up to 50x faster than any computer chip in your laptop or smartphone.”
And get ready for another buzzword! It’s not just A.I., it’s also 5G! Maybe if we’re lucky he’ll throw in cryptocurrencies, too… or marijuana!
“I’ve been researching this story for 5 years now. And I can tell you three companies will dominate this technology in 2019 and beyond.
“If you want to take maximum advantage of this opportunity, the time to get involved is now.
“That’s because this tech is critical for running applications on 5G wireless networks.”
I don’t know whether he’ll be right about the projected gains, or about when these transitions happen, but yes, 5G is likely to significantly increase the demand for cloud processing power, as faster connections means more and more of the actual “thinking” is done not on your device (your laptop or your mobile phone), but in the “cloud.” Which, yes, means better stronger faster servers and processors will continue to be in demand in those data centers.
Then we get to an image of the cool litlte “device” that Brown says will make this all possible:
“2019 is the year that ‘intelligent’ machines jump from science fiction into your everyday life.
“And none of it is possible without this device here.”
I didn’t want to borrow the altered image they used in their presentation, but from what I can tell it’s just a photo of a high-end NVIDIA GPU with the name obscured. More on that in a minute (yes, we’ve given away one of the secrets already!)
And Brown makes a point of citing the importance of AI to politicians, and claims that a recent executive order is going to be key… that’s Executive Order #13859, which was issued back in February, and it certainly expresses a government interest in developing AI, investing in R&D at the government level, and maintaining US leadership in that industry… though whether the specifics mean anything to any one company is another question. Regulation is, as usual, behind the industry when it comes to AI and privacy controls and things like that, so we don’t really know yet whether the government will take a firm hand.
The special report he’s peddling is called “The First Trillionaires: 3 Ways to Profit from A.I.’s $16 Trillion Wave.”
So, naturally, he’s got three “secret” stocks to tantalize us with… whatever are they? Let’s shovel those clues into the Thinkolator…
“‘Must Own’ Stock #1: Powering the World’s Fastest Supercomputer
“Twice each year, the non-profit organization Top500 puts together a list of the world’s fastest supercomputers.
“And the November 2018 report had a big surprise…
“The number 1 spot belongs to a supercomputer called ‘Summit.’ It occupies a 9,000-square-foot data center at Oak Ridge National Laboratory in Tennessee. And it can perform 200 quadrillion calculations per second. (That’s 200 million billion!)….
“According to industry insiders, the AI Accelerator is responsible for 95% of the Summit’s performance! And guess who makes it?
“That’s right… the first ‘must own’ company I recommend today is the sole supplier!
“That puts this company in the center of a rich $280 million contract from the Department of Energy.”
What else do we learn about this “#1” company?
“It also has partnerships with Oracle, IBM, Amazon, and Google.
“In fact, my ‘Trillionaire’ company #1 designs the most widely used AI Accelerators in the world. It has an 80% market share in its niche…”
And, of course, the big promise:
“By simply buying shares today, you’ll get in on this company’s rocketing profits…
“Which put it on a trajectory like Intel’s back in the ‘90s… when Intel soared over 7,300%.”
So who is this? Thinkolator sez, no surprise, that he’s teasing NVIDIA (NVDA)
NVDA has quietly come back down to “reasonable” on the valuation side — partly because earnings have improved, partly because the share price has fallen considerably from the highs.
And, yes, that “must have” chip that’s shown in the ad is NVIDIA’s GEFORCE GTX, probably the GTX 1080ti, which was last year’s “top of the line” gaming card, though they mostly look the same from the outside. The more recent update is the GEFORCE RTX, which adds their ray-tracing capabilities for gamers at the top of the line in gaming GPUs — mostly priced in the $1,000-1,500 neighborhood.
GPUs were originally developed to speed up visual processing, with their leaps forward in parallel processing capability, so gaming has always been the foundational market for NVIDIA’s GPUs… but they are also being used increasingly for artificial intelligence processing, which takes advantage of their ability to perform thousands of parallel calculations… which they hope will take up some of the slack created when the demand for cryptocurrency mining waned a year ago (the fall in crypto prices erased that quiet aftermarket demand for GPUs from “home miners,” and did so quickly enough to create inventory problems and surprise disappointments for both NVIDIA and AMD, the leading makers of these processors).
And that extends to several purpose-built products that use the same GPU technology — from the “data science” workstation DGX to their Tesla data center GPUs that accelerate servers and make AI processing available through the cloud. And, yes, their GPUs were used to build the Summit supercomputer.
The real advantage I see for NVIDIA, and the reason I held a substantial position even though it hit a stop loss point and I did reduce my exposure, is in becoming the leading provider of a real “operating system” for AI — maybe not literally the operating system, but as every data scientist coming up over the past decade has probably learned more and more advanced tools while using NVIDIA products, including most recently their NGC software platform, that might entrench the technology against the competition from AMD or Intel or others.
NVIDIA took a tumble when they substantially downgraded their forecast for this year, and has also shown some weakness along with the rest of the semiconductor sector as the trade war with China shows signs of suppressing the pace of technology development and investment (and as the big “cloud” operators have slowed their spending spree in the first half of this year), so there’s definitely still plenty of uncertainty… but the business has also matured quite a bit and the AI and GPU businesses are both still seen as “growth” drivers after we cycle through this weaker year.
Analysts expect earnings for this year of $5.30 per share, down from last year’s $6.64, and then a resumption of growth next year to $7.07. So at this point, you’re paying about 21X next year’s earnings for NVDA shares. That’s eminently reasonable for a company that can grow earnings by at least 10% a year, but, of course, it’s still a little frightening for a company that’s seeing earnings drop by 20% this year. Where you come down on NVIDIA will, as always, depend on what you see in the future.
“‘Must Own’ Stock #2: The Leader in “Nano” Computing
“I just told you that Company #1 controls 80% of the market…
“So now let’s talk about the remaining 20%.
“As AI applications roll out to this year, my second “must own” company will play a crucial part…
“That’s because they’re the first to manufacture super tiny, 7-nanometer components!”
What’s the big deal with smaller components? More from the ad:
“… the new wave of AI applications will be even more power hungry.
“That’s where the new 7-nanometer chips shine…
“The smaller the chip, the less power it draws from your battery. And 7-nanometer chips require up to 60% less power than current technology…
“So it’s no surprise this company’s chip is on Google’s Cloud Platform. Or that it’s formed partnerships with Apple, Dell, HP, Sony, and Toshiba…
“And even the U.S. Army (where soldiers’ lives depend on the power staying ‘on).”
And apparently they’re in the “supercomputer” race as well…
“Weeks ago, this company announced it will deliver the next world-record breaking supercomputer, sometime in 2021. (With as much processing power as the next 160 supercomputers combined.)
“That landed the company a fat $600 million contract from the U.S. government.”
The promise here?
“Wall Street hasn’t picked up on these stories yet. Once the word gets out, I expect shares to double again over the next year… with plenty more upside after that.”
This must be Advanced Micro Devices (AMD), which I’ve been (wrongly) skeptical of over the past few years, mostly because of the weakness they had shown over the previous decade in competing with both Intel and NVIDIA. I guess we have to give them some credit for competing with both of those leading companies, surviving, and now arguably thriving — and yes, they have a 7nm chip that they’re selling now, which neither Intel nor NVIDIA can claim.
AMD is certainly not a secret company, though it doesn’t get the level of scrutiny that NVIDIA does — and it has been teased and touted plenty of times as well, most prominently in the never-ending series of ads from Paul Mampilly.
And the company is quite a bit smaller than NVIDIA, and is not having quite as much trouble this year (they’re still expected to grow earnings in 2019). The stock really “caught up” with NVDA in the second half of 2018, and now has 3-year performance that outshine’s NVDA, but it has been quite a bit more volatile recently. Analysts expect earnings of 66 cents this year and $1.02 next year, so you’re effectively paying 30X earnings for a company that analysts think has just started a three-year surge of 36% annual earnings growth. That’s not just reasonable, it’s cheap… if the analysts are right (they have been close to accurate over the past two years, but 2019 is making a lot of people look stupid).
I think I have a block in my mind about AMD, but the numbers say it’s a reasonable speculation.
But wait! There’s more! Final teaser clues:
“But there is still one more stock in my “trillionaire trifecta”…
“One that the AI sector can’t live without…
“‘Must Own’ Stock #3: The World’s Top AI ‘Factory’
“You see, while the first two companies design the world’s best AI Accelerators…
“This third company builds them.
“And they do it better than anybody else in the world….
“Last year, it quietly collected over $33 billion in revenue…
“From tech giants like Apple, Qualcomm, and Broadcom.”
And apparently things are changing quickly…
“…. I expect the next several months to be even more exciting. You see, this company just broke ground on a new $16 billion factory…
“And will begin manufacturing the most advanced AI Accelerators in the world by 2020. I estimate it has at least a 3-year jump on the competition…
“Get in now you’ll even collect a juicy 3.0% dividend while you wait for the big payoff down the road….”
This is, sez the Thinkolator, the big chip foundry Taiwan Semiconductor (TSM), maker of chips for much of the world. Have you heard references to “fabless chip” or “fabless semi” companies? Those are companies that design their own semiconductors, but don’t actually manufacture them — the manufacturing is done by massive foundries owned by companies like Taiwan Semiconductor, which is far and away the big daddy in this industry.
And, to be sure, a well-known one — Taiwan Semiconductor is one of the largest companies in the world, with a $200 billion market cap. And it has margins that would delight pretty much any other manufacturing company, but this is, at heart, a big industrial firm — they run giant foundries and sell wholesale chips based mostly on customer-provided designs.
They have a strong balance sheet with very little debt, pay a good dividend (about 3.2% currently, though they only pay once a year and it goes ex-dividend next week, so all else being equal the shares should drop by $1.27 between the close on 6/23 and the open on 6/24 to reflect that dividend payment).
On the flip side, though, this isn’t a brand and they don’t necessarily have huge pricing power — though they’re arguably in a stronger position than the folks at the next step in the outsourced electronics manufacturing business, the assemblers like Hon Hai/Foxconn. The pressure is always on to reduce costs in the chip business, so they have some trouble maintaining any profit margin since their big customers (like Apple) demand a lot of concessions… and, thanks to the “trade war” fears and order slowdown, they have recently seen revenues decline and posted the worst quarter for gross margin and overall profit margin that they’ve seen for about five years.
But yes, if there is a huge surge of demand for AI-empowering chips from the likes of NVIDIA and AMD, then Taiwan Semiconductor should see revenue growth. Whether they claw a little margin back from their big customers or just work to keep revenue high, I don’t know – the thing that worries me about companies like Taiwan Semi is that they grow but they are far more boring than the chip designers or the actual consumer product designers, with far less growth potential. But that said, they are certainly a lot more stable, and they do pay that dividend — here’s a chart of Taiwan Semi over the past 15 years compared to the S&P 500, which shows you the power of that relatively steady growth:
But you can then add some other stocks to the barrel to show that comparison — they did far better than a really weak performer in the Semiconductor space, good old AMD:
And far worse than a couple high-profile “hitmakers” — NVIDIA designing the successful GPUs that companies like Taiwan Semi build…
And Apple, designing the hit consumer products that drive demand for so many different kinds of chips…
The wholesalers and manufacturers might do well, with the best of them like Taiwan Semiconductor showing strength and steady growth in a growing industry… but it’s the hitmakers, designers and brands that have much greater potential to show exceptional growth (or true disappointment).
So with that, dear friends, I’ll turn it back to you — have any interest in building positions in NVIDIA, AMD or TSM as artificial intelligence continues to grow in importance? Have any other favorite plays on these large technology trends? Let us know with a comment below.
Disclosure: Of the companies mentioned above, I have positions through either equity or call options in Google parent Alphabet, Amazon, Apple, and NVIDIA. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.