ed note: This article was first published on March 31, 2016 — the ad has been changed a little bit and now we’re seeing a version that leads with “Virtual Reality Pornography” and catches your attention that way, though the company being teased and hinted at is still the same. What follows was published on 3/31/16 and hags not been updated or revised.
Ray Blanco is flogging his Technology Profits Confidential with an ad that promises “three companies almost no one knows about” in the virtual reality space — which, given the widespread interest among investors in virtual reality as the “next big thing,” means our interest is piqued.
So what’s the idea?
Well, first you have to sit through a long presentation about the potential of virtual reality — walking on the Great Wall of China, having dinner with Shakespeare, standing on top of Everest, exploring King Tut’s tomb… all without leaving your home. Obviously pretty cool, and gradually getting closer to reality as we see better visual processing, better cameras, more robust chips, higher resolution visuals, etc.
Don’t worry, I won’t make you endure that. You can check out the ad here if you want the full magilla, we’ll jump straight to what he thinks the investment opportunities are and see if the Thinkolator can parse his clues and give us some answers. Heck, you can even subscribe to his letter if you want to — but please let us tell you what the stocks are first, that way you’ve got a chance to think about them rationally for yourself.
(Are you familiar with the concept of “anchoring” in behavioral psychology? In the context of investing, anchoring often means that we subconsciously overweight the first information we learn about an investment — the first piece of research or analysis often holds much more sway than subsequent research, regardless of the merits of any of it. If the first thing you read is that a particular stock is going to dominate the market for decades, then it’s very hard to dislodge that notion completely even if the forecast is perhaps irrational… that’s why I try to make sure to look at least somewhat critically at new stocks or ideas that come our way, as a quick counter to the wild promises made in most of the ads. The initial greed impulse, once implanted in our brain, is hard to dislodge even if subsequent research makes the initial claims look spurious. We must all try to be vigilant in facing up to our staunchest investment enemy: our own brains.)
So what does Ray Blanco tell us? Well, the clues are a little thin… but we’ll see what we can do. Here’s the first bit that caught my eye:
“This Company Could Be Bigger Than Apple, Google, or Microsoft… It’s the Future in a Nutshell
“When Facebook’s Oculus virtual reality device comes out in the months ahead, one company I want you to know about today will be responsible for a big part of the guts of that device.
“Even better, if the Oculus takes off and becomes a worldwide sensation, this company wins big.Are you getting our free Daily Update
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“If the Oculus gets surpassed, however, by a device from Google, Apple, or some other competitor, chances are good this company will make the guts of those devices too.
“This company, in short, is the far-and-away worldwide leader in the visual technology that makes virtual reality devices work.
“Put another way, if you don’t have this company, you don’t have first-class virtual reality!
“Think of it like this… this company takes all the “content” we talked about and makes it look REAL.
“We’re not going to see virtual reality turn into a $30 billion business by 2020, in other words, without this company’s technology.”
Huh. Sounds like clues… but not particularly specific. What else?
“Fortune wrote in late November, for example, about how this company is getting into eSports – basically, how in-person gaming experiences can be beamed to anyone anywhere.”
OK, that’s a little better. More?
“For example, the company recently posted a video of a virtual reality experience showing what it’s like to stand at the top of Mount Everest.”
OK, so the Thinkolator is telling me that Blanco is almost certainly pitching Nvidia (NVDA) as this first stock. Nvidia makes graphics processing chips/units (GPUs), and is the leader in that business. Most of their revenue comes from advanced gaming computers at this point, with the special graphics cards that make the best games faster and better, but they are also turning that processing power toward self-driving cars, data centers, and, as Blanco notes, virtual reality.
They did “double down” on their investment in “esports” late last year, and that was reported in Fortune. Their chips were also used to create the Everest VR experience that wowed a lot of tech journalists in recent months (and there is indeed a video of it on their website)… here’s how they describe the role their tech played in that VR experience:
“NVIDIA GPUs not only render the VR experience, but also were used in the creation of the ultra-realistic 3D model of Everest from more than 300,000 high-resolution photographs taken of the mountain.”
I like Nvidia, and have some exposure personally through 2018 LEAP options, but I’ve not bet big on the company because I think the virtual reality talk and the self-driving cars talk has probably driven the price of the shares up a bit too quickly (if you recall, Michael Robinson at Money Map has also been touting NVDA for virtual reality, and the Motley Fool has pitched them as an entree into self-driving cars for almost two years), but the core gaming business is still about 60% of NVDA’s revenue and, given the costs of ramping up new businesses, probably more profitable than most of their business lines at this point (other than IP/patent licensing, which is always high margin). You can see the rough breakdown of NVDA’s quarterly sales here, from their fourth quarter presentation.
Nvidia beat analyst estimates in the last two quarters, and is currently showing nice year-over-year growth in revenue and earnings, but analysts seem to expect it to plateau a bit after this year — they’ve got NVDA penciled in for $1.45 per share in earnings this year (that’s after $1.08 last year, so nice growth) and $1.40 next year, with pretty tepid revenue growth (6% this year, 1% next year). That’s what worries me a bit about NVDA, that there’s this disconnect between investor enthusiasm and analyst earnings projections — which is probably based on expected slowness in GPU growth from some of their older, lower end products (like graphics cards for “regular” PCs and notebooks, as opposed to advanced gaming cards or services) and the expectation that their newer businesses, data centers and autonomous cars and virtual reality (which is really mostly part of the gaming business, since virtual reality’s first commercial application of any scale will be high-end computer gaming) will fail to grow quickly enough to take up any slack… or are, at least, new and volatile enough to be a bit riskier, so maybe more analysts are just being conservative.
NVDA is also paying a small dividend and doing substantial share buybacks (they’re likely to buy back 5% of the company this year, for example), so that could help to boost the per-share numbers a little bit — but that’s been going on for a while and analysts are no doubt fully aware of the situation. They are not generally super-specific with their guidance, and the guidance is only for the current quarter, so the analysts are doing quite a bit of guessing — which is why they have a wide range of forecasts, and why NVDA often “misses” the earnings.
I’m still very positive about the company, and think they have some real potential to continue the aggressive growth in their data center and artificial intelligence/autonomous cars businesses, and virtual reality is likely to gradually become meaningful as a bigger driver of the gaming business as well if the Oculus Rift, HTC Vive and other products are as big and “mainstream” a hit as expected… I just have some suspicion that we’ll hit some speed bumps this year and might have the opportunity to buy at a better price (that’s means there’s potential “risk of missing out,” of course — I often “nibble” at stocks that I like but that I think will present better buying opportunities later — if I own it, I’ll watch more closely for those opportunities). NVIDIA leads in a lot of these markets, but they’re immature and revenue is not very predictable and there’s a lot more competition in the “growth” segments than there is in their more commoditized old “graphics card” business or core gaming services business. The stock has been highly volatile over the past four or five months, and my expectation is that the volatility may well continue.
And… we’re out of time for today, but Ray Blanco did also hint at two other companies in the sensors/chips arena that he’s picking for VR excellence, I’ll dig into those for you next time around. Until then, feel free to chat amongst yourselves — like the potential for virtual reality? Think NVIDIA will be a huge player? Have other favorites you prefer? Let us know with a comment below.
Disclosure: I own 2018 LEAP Call Options on NVDA, and also own stock and/or call option positions on Apple, Facebook and Google/Alphabet, all of which are mentioned above. I will not trade in any of those names for at least three days per Stock Gumshoe’s trading rules.