This article originally appeared as part of the Friday File for the Stock Gumshoe Irregulars (our paid members) on November 20, 2015. The article has not been updated or revised, other than a couple quick updates to numbers and valuations, but we’ve had questions about the ad of late, so we’re moving it back to the top of the page for everyone to see.
In the ten months since this piece was published, the price of the “secret” stock that is the primary focus of the ad (OK, it’s NVDA — no more secret!) dropped a bit and then recovered on the strength of a good report, some optimistic guidance, and some raised earnings expectations, and then it went ballistic thanks to some blowout numbers and rapid growth projections for their new graphics chips and the possibilities for their processors when it comes to data centers and driverless cars (and, yes, virtual reality). The stock has now just about doubled from where it was when the ad first appeared.
The meat of the ad appears not to have changed at all, including the continuing promise to send you a “prototype” (you can buy one yourself for $5 too, if you like, more on that at the end of the article), though the ad is now being used to promote a different newsletter (they were originally selling Radical Technology Profits, now they’re selling Nova-X Report using pretty much the same ad).
I owned call options on NVDA last year when this ad first started, but have since sold them and no longer have any direct exposure to NVIDIA (though I may be interested in re-entering a position… I’ve been hoping for something to prick the bubble of enthusiasm on this one, though it hasn’t happened yet — we got a 5% dip a couple weeks ago but it didn’t last long). So with all that said, here’s your trip down memory lane…
The Money Map Press folks seem to have replaced Stansberry (both are Agora affiliates) in the position of “quickest to saturate the known universe with email ads” — the two they’ve been pushing this week, the solar spiel from Dr. Kent Moors that we talked about earlier in the week and this new “Neural Imprinting” promo from Michael Robinson that we’ll talk about today, filled my inbox faster than anything else in recent memory since Dan Ferris’ old “Next Great Royalty Company” pitch for Stansberry.
And, of course, when our readers pile up at the door, ringing the bell with abandon, it’s our mission to answer. So we’ll figure out who’s being teased by Robinson here, and hopefully get some sense of the reality of the situation. As always, there’s bound to be something real under all that hype, right?
The big picture claim is that “you have a chance to position yourself in this company and see 6,642% growth” because of the dominant patent position that this “secret” neural imprinting company has in virtual reality and a special kind of computing power.
Sounds pretty enticing, right? Presumably he’s making the leap of faith that nearly every big picture newsletter pitch does, assuming that because this company has some technological advantage in some way, and the overall market is perhaps going to grow dramatically, that this company will control the market in the future. That sounds awesome, every time, because we remember Intel (INTC) and their dominance in personal computer chips, and remember how that generated 4,000%+ gains for INTC stock over the last 25 years thanks to the strength of the “Wintel” market position (or 40,000% gains over 40 years if you go back to when IBM’s Altair 8800 was the first PC with an Intel chip)… many of us do not always remember that there were other companies developing chips back then, too, or that many of them failed.
Just as an example, one of the few competitors from back then that’s been a publicly traded company over that whole time (many more have disappeared, were small parts of big companies, or have been bought or sold along the way) is Advanced Micro Devices (AMD), the company that licensed Intel’s designs to be a second-source supplier for IBM — that was back in 1982, the beginning of what became a very contentious and litigious relationship between those two companies. If you had bought AMD on that news and held on for 33 years, you would have lost 26%. If you had bought Intel on that same day, you would have gained 16,000%.
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The winners and losers are not always all that clear before the game is over — and, of course, if you’re a person who dreams about 16,000% gains, remember that they can be very difficult to handle emotionally… to get to that 16,000% gain in INTC as of today, you would have had to sit through at least one 80% loss and a handful of 20, 30, 40% losses over the years. Could you invest $10,000, see it grow over decades to $2 million at the peak, and not sell when it drops below a million? If so, congratulations! Your $10,000 in INTC 33 years ago today (inflation adjusted, that would be about $28,000 today) would have turned into $1.6 million.
But anyway, my point is to remember that business history favors the winners and quickly forgets the losers. It’s easy to forget that for every Apple there’s a NeXT, an HP, a Compaq, a Packard Bell, a Commodore, a Digital Equipment, a Tandy. People aren’t as good at predicting the future as we think we are, particularly when it comes to specifics about “revolutions.”
So there’s your buzzkill — with that under our belts, what’s the stock being teased by Michael Robinson?
Here’s a little bit of the intro from the story, for those of you who haven’t killed a half hour reading it yet (if you print out the transcript, it’s 55 pages long):
“While on patrol on the outskirts of Kandahar, Afghanistan, First Lieutenant Scott Jackson’s Humvee rolled over an IED buried under the dusty road.
“The explosion transformed his vehicle into a ‘twisted inferno.’
“And while he was able to heroically escape the wreckage, 30% of his body had been covered with life-threatening, third-degree burns.
“First Lieutenant Jackson’s injuries were so severe, he was immediately air-vacced to a burn specialization unit in Germany.
“But the doctors were unable to effectively treat him.
“Morphine was useless. The agony had so enveloped his body that even in his sleep, he dreamt of being on fire.
“Out of desperation, he was sent to the Institute of Surgical Research at Brooke Army Medical Center in San Antonio, Texas.
“Here, doctors had begun testing an experimental new treatment: A ‘Neural Imprinting’ device.
“It is non-invasive, drug-free, and has no dangerous side effects.
“But, most importantly, during initial studies, it had demonstrated a nearly miraculous ability to eliminate extreme pain.”
Robinson provides a few other examples of this, too — phantom limb pain, chemotherapy pain, etc., all “cured” with “Neural Imprinting.”
So what’s he actually talking about? Virtual reality. Video games, particularly immersive virtual reality video games, have reportedly shown some substantial potential to distract people from their pain. And when you distract people, the pain subsides sometimes. I can vouch for that with regular video games, you don’t even have to have “virtual reality” sometimes — for one of the Little Gumshoes, I’m quite sure I could remove one of his toes without him flinching if he happened to be playing Minecraft at the time.
Robinson goes on and on to build the argument about the power of this “medical and technological revolution”, and to argue that it’s built on the technology of one specific company:
“Which is why a single company that’s less than 1/20th the size of Johnson and Johnson, yet is at the center of this $2.86 trillion medical and technological revolution…
“Won’t take 30 years to deliver these kinds of returns.
“In fact, over the next three years…
“80.2 million Neural Imprinting devices will be sold around the world…
“Launching this company’s revenues up 6,640%.
“And you now have a chance to be right there at the beginning of it all.”
What else do we get by way of clues? Here are a few:
“… the same firm I’ve been telling you about today controls 7,300 patents tied to this technology.
“So anybody who wants to tap into what they’ve created will be paying a hefty price. And when they do, you could get a piece of the action as well.”
Mmmm, patents. Patents for what, I wonder?
“It’s the final piece that’s the real breakthrough. This is what makes Neural Imprinting, and all forms of virtual reality, possible.
“The Virtual Processor Unit – which I’ll just abbreviate as a VPU from now on.
“The VPU creates virtual worlds faster than the speed of thought.”
“… instead of the eight to 10 cores on a typical CPU…
“The VPU can holds up to 8 billion microscopic transistors.
“To put that into perspective, at just 232 square millimeters – a VPU would be lost under a single business envelope.
“Yet it holds more of these micro-transistors than there are people in the world.
“This allows the VPU to use an advanced method for handling immense amounts of data called Parallel Processing.
“With Parallel Processing, data signals are able to run through all 8 billion micro-transistors at the exact same time, performing up to 8 trillion tasks per second.
“That’s up to 300 times faster than some of the best CPUs on the market today.”
So that’s what we’re looking for here — the company that makes this “VPU”… more from Robinson…
“The VPU’s secret weapon – Parallel Processing – gives neural imprinters the ability to create 360-degree, 3-D responsive worlds in real time.
“With a VPU, instead of watching a video of someone walking alongside a lake, you can become that person.
“You’re not forced to look at a scene in one fixed direction.
“Instead, you can see 360 degrees of your surroundings… created in real time as you turn your head.
“The millions of digitally rendered blades of grass move under your feet. You can skip a rock on the water and watch the ripples as they’re created.
“This happens so fast that your brain instantly accepts it as reality.
“That’s why Neural Imprinting is so effective.”
Anything else? We do get a few more little snippets about this secret “small” company…
“The same small company that invented the technology dominates the VPU patent pipeline.
“Because, as I’ve mentioned, they control 7,300 VPU patents.
“This has made them an almost unbeatable power in virtual reality – allowing them to tap into this exponentially growing industry.
“That means they’re positioned to get a piece of the lion’s share of VPU-enabled devices sold over the coming years.
“And that goes far beyond Neural Imprinting and the $635 billion pain relief industry.
“This firm’s patent pipeline will dramatically change nearly every aspect of how healthcare is practiced moving forward….
“That same processing power is now being used to revolutionize medical imaging.
By replacing the standard CPU in MRI machines with VPU technology, doctors were able to cut that imaging time to just 97 seconds.
“It cuts CT scans down to 59 seconds…
“And PET scans down to a blazing fast 13 seconds.”
What else do these VPUs do?
“VPUs grant cars the gift of sight.
“Here’s a way to understand this.
“With Neural Imprinting, a VPU helps ‘imprint’ a virtual world in a human brain.
“With cars, VPUs work in the opposite way.
“They help imprint a real world, in a virtual brain.
“If you have bought a new car recently, chances are it is equipped with hundreds of sensors, as well as front and back cameras.
“And for more and more of these cars, the information being captured and recorded from these devices is being fed into the virtual brain of that automobile.
“It’s being fed into a VPU.
“The VPU is processing this real world information to create a virtual 3D map of the car’s surroundings.
“This way, in real time, it can identify objects on actual roads….
“For instance, Google’s self-driving prototypes rely on VPU technology.
“And they have already traveled more than 1 million miles… the equivalent of 75 years of human driving experience….
“Audi made headlines when its autonomous car drove itself 550 miles to CES in Las Vegas.
“BMW is developing a feature called Remote Valet Parking assist, which drops you off at your door then parks itself in your garage or on the street.
“And in October, Tesla released the beta version of an updated Model S car that literally drives and parks itself.
“All of these car makers – Audi, BMW, and Tesla – rely on a VPU to act as the brains of their autonomous features.
“And each of them have a standing relationship with the one company that controls this 7,300-strong patent pipeline….
“…. the biggest player in the automotive industry is no longer a company that makes cars. It’s the one that makes the virtual brains – the VPUs – inside them.”
So what are these VPUs, really, and how much do they cost?
“Today, the firm that invented the VPU is selling a basic model for just $27.50.
“So think about that. They’ve found a way to produce this technology cheaper than what a current CPU costs.
“And the VPU isn’t just for traditional computers. It’s now cost-effective to use the VPU in every tablet and smartphone.
“With a VPU delivering as much as a 300-fold boost to the processing power of the fastest computer on the market, you can imagine how much of an improvement it could deliver to the devices you are using in your everyday life.
“Which is why this company has already quietly formed deals with Apple, Microsoft, IBM, HP, Toshiba and Google.”
OK, so why haven’t we all heard of this company? Well, you probably actually have heard of it. One more small slice cluey deliciousness:
“The founder and CEO was a microprocessor designer at AMD – the $1.7 billion chipmaker.
“His co-founder was an engineer for both Hewlett Packard and Sun Microsystems.
“Their executive vice president also jumped ship from Sun Microsystems, where he was a board member.
“And leading their financial team is a former senior VP of Cisco.
“And together they’ve quickly developed the VPU technology that could make this one of the biggest and most lucrative companies on the planet.
“This company’s revenue streams are directly dialed into more than 20 multi-billion dollar industries.”
This is, as you may have guessed by now, graphics chip pioneer NVIDIA (NVDA).
Which has also been teased as the “brains” behind self-driving cars in a series of Motley Fool teaser ads that we covered last year here, and it’s still apparently a prime pick of David Gardner’s. Their biggest single market today is graphics processing chips for desktop gaming, particularly at the high end of the market, but their leadership in visual processing is impressive and does provide at least a reasonable backdrop to Michael Robinson’s promises that they’ll dominate in virtual reality and medical imaging and self-driving cars and whatever else. Neither virtual reality nor driverless cars are going to make NVDA rise 6,000% in the next few years, things don’t move quite that fast, and I suspect that a chipmaker is never going to become the biggest revenue winner from increasing sales of more advanced medical imaging equipment, but Robinson’s not the only one who sees those areas being drivers of their future growth.
NVIDIA has also been on a nice run over the last few months, rising by more than 50%. It’s a good-sized company, with a market cap of about $17 billion — and as we’ve grown accustomed to with big tech companies, they’ve got plenty of cash (about $6 per share in net cash). They are profitable, and they are growing both revenue and earnings, but analysts are not as optimistic about it as Michael Robinson (or David Gardner) over the next couple years. Average analyst estimates indicate that revenue will rise about 20% over the next couple years (in total), and that the margins will improve by a few percentage points, which will bring earnings per share to about $1.35 by their next fiscal year… but they’re expecting earnings growth to slow markedly after next year, growing by only 5% or so per year.
This isn’t so unusual — analysts get bogged down in actual orders, industry forecasts, pricing trends and the like and are often much less optimistic than pundits who start with big picture excitement about fantastic ideas. That’s not to say that pessimism is always the better path, since it will make you miss a lot of genuinely fast-growing stocks… so if Gardner or Robinson are right about this one, for example, you might think that it’s a bargain at a forward PE of 23. And maybe it is — it’s definitely priced for more growth than the analysts are expecting, but it’s certainly not ridiculously inflated… if you back out the cash, the forward PE is only about 18. Not cheap for that kind of growth rate, but far from ludicrous.
I kind of like NVIDIA, though I’ve not owned shares as far as I can remember. It’s an appealing founder-led and investor-friendly company with a strong and long-lasting leadership in a niche that has become more important (graphics and video processing), and they’ve made a real effort to diversify the business, mostly in data center processing and automotive. Gaming is still the lion’s share of their business, as it has been since their first GE-Force graphics cards enabled the rise of much more advanced desktop gaming about 15 years ago ago, and it’s also still growing — with Virtual Reality as a part of that, including their new GameWorks resources for VR developers, so despite the diversification efforts gaming remains the real driver on the bottom line, and that will probably be true for the foreseeable future.
Their chips are not necessarily in the virtual reality headsets, but those headsets are not stand-alone devices in most cases, they’re getting their computing power from the machine they’re connected to — and that’s more often than not going to have an NVIDIA graphics processor, at least for higher-end applications. Those are not the $27.50 ones, of course — that’s about what an entry level graphics card for a desktop PC will cost you, the fancier new ones that they’re selling now, like their latest TITAN graphics card, top out at something like $650.
You can get a very brief overview of what they think are their key businesses and growth areas from their most recent investor presentation here, or a much more exhaustive set of presentations on their various businesses from their Investor/Analyst Day back in March. And one of the better Motley Fool analysts had a nice quick piece on their most recent quarter here that’s worth a look.
From what I can tell after doing just a little browsing, the concerns that analysts have are mostly about gaming — they are worried that gaming revenue is not going to continue to be a big growth driver as it has been this year, presumably because new consoles and mobile devices continue to supplant PC gaming to some degree (and even if NVDA processors make it into some of those devices or consoles, the margins may be much lower than for high-end desktop gaming equipment)… and gaming has been both the biggest segment and the growth engine for NVDA for most of their history. Despite the fact that they are making inroads in data center processing and automotive and other areas, those just aren’t big enough yet (or growing fast enough) to make up for any real shortfall from GE-Force and gaming. If such a shortfall appears. So that appears to be the risk: Their growth areas are still dominated by gaming, and investors worry gaming may not carry the load in the future.
Still, they are making strong inroads into automotive processors and in-car entertainment systems, and they do make a compelling argument that their processing acceleration will be the next wave forward for increasing processing power and speed as chips hit a “can’t make them smaller and faster anymore” physical limit. And they do pay a small dividend and buy back a lot of stock.
Robinson goes on to say that…
“You will also discover that, since this is a virtual reality technology, this firm is perfectly positioned to capitalize on …
“The coming $20 billion a year virtual reality video game revenue stream.
“Because the systems that run these games rely on VPU technology.
“And even though that figure would represent just a fraction of their overall revenue streams, it could position this firm as the #1 gaming company in the world.
“Bigger than the revenues from Microsoft’s Xbox and Sony Playstation combined….
“… it is at the center of what is, in total, a record-breaking $2.86 trillion opportunity.”
I don’t know how you can make those numbers fit reality, at least for the near term. Microsoft’s total annual revenue from their devices and gaming division, which includes the Surface as well as Xbox, is maybe $4 billion or so. Sony is probably similar, I haven’t checked. NVIDIA already has annual revenue of $5 billion, though perhaps only half of that is specifically from their gaming businesses. NVIDIA did make some of the chips inside the first Xbox, and it was a big win for them a dozen years ago, but they also had a pricing dispute and they apparently ended up losing money on a lot of that business. Their OEM chips and intellectual property revenue are the large “legacy” business at NVIDIA that they don’t talk about much, and they’re not focusing on growth in those areas at the moment. And yes, they do have about 7,300 patents, as teased… I have no idea how many of them are valuable or generate licensing revenue (their IP revenue, from licensing those patents or designs, is very small right now).
NVIDIA does completely dominate the market for high-end graphics processing units (GPUs), the gaming-focused chips that they invented and which formed the foundation of the company back in 1999 and which, who knows, might become more important in virtual reality and other areas for visual processing.
But just to come full circle, guess who has the second position in those graphics “cards” behind NVIDIA’s GE-Force? It’s good ‘ol AMD, long-time second banana to Intel, which bought NVIDIA’s competitor ATI back in 2006 for about $5 billion. So far, it’s another flop for AMD as they’ve failed to bite back more than about 20% of the market for high-end graphics cards (and yes, AMD itself is now only worth about $1 billion). So I think NVIDIA can pretty much be confident that they’re not going to lose this core part of their business — if needed, they’ve got plenty of financial flexibility and they could just drop prices by 15% and probably put AMD out of business entirely within a year or two, but they haven’t lost market share yet from the reports I’ve read.
NVIDIA is also selling a “sort of” competitor to the Xbox, their SHIELD performance tablet designed for gamers, and TV “box” that’s like a more gaming-friendly Apple TV — neither of those is likely to be a big revenue driver, given the size and dominance of the competition, but you never know.
So as a stock, this is really another mismatch: Do you buy the big future potential from as-yet non-material businesses like virtual reality, and embrace their technological leadership in visual processing, or do you worry about the somewhat slower-growth immediate future if gaming growth slows a little in the next few quarters? I’ve been meaning to dig further into NVDA for a while, so while I wish I had done so before the big jump the shares have made over the past month or two I am generally liking what I see… as long as I keep my rose-colored glasses on and imagine stronger-than-the-market-expects growth for their virtual reality and automotive processing businesses.
But that’s about it — either the valuation is a bit too high at ~30X next year’s earnings, or the growth expectations from analysts are a bit too low at 5% a year to 2020 — I’d be willing to make a small bet that it’s the latter, but not a big one.
Oh, and I’ll go out on a limb and say that the “Neural Imprinting” stuff Robinson talks about for pain relief through virtual reality, though very cool, is not going to show up in a meaningful way on NVIDIA’s bottom line in the next five years (or ever, probably).
Even if it turns out that this immersive virtual reality stuff is very useful for analgesia, as it seems to be for at least some people, there’s no indication that health care facilities would need anything more than a low-end gaming machine and a virtual reality headset for a few hundred bucks to provide this service… they did find that immersive virtual reality was much more effective than just playing Nintendo games, but that virtual reality system they used in the story cited by Michael Robinson for a burn victim, though it cost about $35,000, could probably be replicated for much less than 10% of that cost today (the story, which you can read here in GQ, was published back in 2012 but the events took place in 2006). So even if every hospital and therapy center bought that, or every patient, that would be dwarfed by the consumer gaming market. I think consumers are going to drive virtual reality (or fail to drive it, perhaps), and any therapeutic benefit will be just a nice bonus for society, not a meaningful generator of revenue for any companies who make virtual reality hardware or software.
And finally, probably just to make me cranky, Michael Robinson tosses in a little spiel taking credit for his recommendation about a “special opportunity” in “Living Metal,” He says is a sign of his ability to bring wonderful things to his subscribers — that was his pitch about Stellar Biotechnologies (KLH.V, SBOT) from August of 2014, just as the stock was getting up well over $1 (on the strength of Robinson’s pitch and other hype it got over $1.50 for a very brief while) because Robinson and others were certain that it was on the verge of uplisting to the Nasdaq, and he said at the time that you had to jump on this chance to buy “round lots” before it IPO’d. I wrote about it at the time, of course, because that’s what we do.
And, as we said then, anyone who wanted to could have bought plenty of shares, “round lots” or no, since it had been trading on the Venture exchange in Canada and OTC In the US for years… and all the hype about an IPO “uplisting” did was get the shares lifted to even more ridiculous levels, only to drift back down again for a year. None of which made the economics of the company seem any more sensible.
And now it has finally uplisted to the Nasdaq after a 10:1 consolidation/reverse split, trading at SBOT instead of the old OTC SBOTF. Split adjusted, the shares today are trading at… 25 cents. $2.50 after the consolidation.
The company is still moving remarkably slowly, more than two years after a different newsletter (from Nick Hodge) pitched it at also about 60-70 cents, as I recall, and told us it was about to change the world of immunotherapy and cure cancer and fix pretty much everything else that ails us. Revenues continue to creep up slowly, expenses creep up slowly, and there’s a lot more press releases about possible uses for KLH that might drive prices up than there are actual sales of KLH or agreements to receive royalties on KLH-enabled drugs in the future.
The cash burn is fairly slow, so they’re doing OK for now — but, on the flip side, that’s because, according to their financial statements at least, they don’t seem to be really spending much money on building the business or marketing or R&D. Seems to me like they’re sucking blood out of their mollusks, selling it to labs, and hoping someone will make them wealthy as a result — I’m sure that’s not the way they’d tell the story, and maybe there will be some hope, but after a while you just have to let your cynicism take hold. They can grow molluscs pretty good, and bleed them without killing ’em… it’s just that, so far, the world doesn’t care very much. And it makes me grouchy that Robinson is touting this as a “win” for his subscribers at the time, and a reason why new folks should subscribe now.
Oh, and I almost forgot to mention about that “Neural Imprinting” — Robinson’s going to send you a free “prototype” too:
“I will also send you a prototype of the revolutionary Neural Imprinting device.
“Again, this is only for the first 500 people who respond today.
“You don’t need any special equipment to operate this Neural Imprinting headset.
“All you need is an Android or Apple smartphone to download the virtual reality simulation apps…
“Within minutes of your device arriving, you can follow the simple step-by-step instructions and experience the incredible effects of Neural Imprinting and virtual reality for yourself.
“And this gift is yours to keep.
“But you must hurry. I anticipate these membership slots will fill up fast.”
Hmmm… wait, I can do this with my phone? Then why the heck do I need this fancy “VPU” chip from NVIDIA, or a fancy virtual reality headset?
What Robinson is undoubtedly going to be sending you as his “Neural Imprinting Device Prototype” is some variation of Google Cardboard — which does look pretty cool, it’s basically a way to turn your phone into a fancy next-generation stereoscope so you can see immersive postcards, basically, though apparently you can also view 3D immersive video and play some games so it’s not just still images.
You can buy one yourself for five or ten dollars if you like in lots of places online, most of them are literally made of cardboard and it’s designed to provide a cheap, accessible version of virtual reality without waiting for the $400 Oculus Rift headset. Certainly there’s no reason to pay much more than $20 unless you want one that looks like an old ViewMaster or is made of aluminum or something… once you’ve got it, you just download the Cardboard app from Google (or one of the many others that uses the technology now) and put your phone inside the viewer and it creates the stereo vision that’s enhanced by 3D and 360 degree immersive imaging (as in, you can turn around in a circle and see a 360 degree view of whatever is in the app or game or video you’re using, and the stereoscopic vision means you can see it in 3D). It’s pretty cool, and I’ve been meaning to try one out, but I think I’ll just pay $20 for it instead of sending Michael Robinson $1,950 for a subscription to his newsletter, his special report on the “secret” VPU stock that is actually just good ol’ NVIDIA, and a “Neural Imprinting device prototype.”
And frankly, I’d kinda like to see him pay me for his past, highly misleading promotions about Stellar Biotechnologies and the SharesPost 100 Fund.
Just kidding. Keep ’em coming, Michael — I can’t get enough of the ridiculous promises, and thanks for continuing to give Stock Gumshoe so much to chew on.