Investing in societal macro trends is a time-proven tactic for building wealth in the stock market.
This fact is proven over and over again as the years go by.
From the industrial revolution to the internet boom, investors who recognized and wisely invested in such sea-changes have earned great wealth for themselves and sometimes for generations into the future.
Just how does one go about investing in these macro trends?
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Well, it’s a very simple two-step process.
The first step is to recognize the trend and the second is to locate companies that are positioned to continue to build their profits by providing products and services that profit from the overall macro trend.
I am not talking about upstarts or new IPO’s with exciting technology. While these firms CAN be incredible stock market winners, the risk is generally too high for my tastes.
I am talking about established companies that have the proven infrastructure and management to handle the years of pending expansion and growth.
We have identified one company that is poised to continue to earn solid profits from not just one mega trend but two.
These trends are vehicle automation and gaming.
Video gaming is a $65 billion global market. The trend upward will only continue to expand as personal wealth expands into emerging markets.
While video gaming is an exciting trend, even more exciting from a profit standpoint is the vehicle automation trend.
Most new cars today have some form of automation that was only science fiction a few short years ago. Currently, there is an arms race of sorts between new firms like Tesla and the entrenched automakers to be first to market with a truly autonomous self-driving car.
I can hear you asking, what could possibly be the connection between the video gaming and vehicle automation trends?
There are different companies in each of the sectors with no apparent overlap on the surface.
However, there is one overriding item that both of these trends demand. In fact, the trends just don’t demand it, the progress simply would not exist without this product.
If you haven’t already guessed it, I am referencing graphic processing chips. These high tech chips are the power behind everything from video games to vehicle automation.
The company that we have identified that is best poised to exploit both of these societal mega trends is NVIDIA Corp (Nasdaq:NVDA).
The share price has surged nearly 50% over the last 52 weeks and we expect the upside momentum to continue.
Here’s a closer look.
NVIDIA invented the GPU or graphic processing unit in 1999. Without this creation, video games, vehicle automation and a host of other creations, we take for granted, would simply not exist.
NVIDIA’s work in visual computing — the art and science of computer graphics — has led to thousands of patented inventions, breakthrough technologies, deep industry relationships and a globally recognized brand. For two decades, we’ve pioneered this uniquely powerful medium, which has transformed the PC from a tool for productivity into one for creativity and discovery.
The company is well known for creating one of the most complex processors ever developed, the Kepler™ generation of GPUs boasting an astonishing 7 billion transistors.
The GPU has propelled computer graphics from a feature into an ever-expanding industry — encompassing video games, movie production, product design, medical diagnosis and scientific research, among many other categories. GPUs are now driving new fields like computer vision, image processing, machine learning and augmented reality.
The overall mega trend that encompasses video gaming, vehicle auto and the categories listed above is known as visual computing.
Consumers are demanding rich graphics amid a massive proliferation of mobile devices. The world’s leading OEMs, from Apple to Audi, will build computing devices that incorporate more than 2 billion GPU cores In response to this demand, NVIDIA created the world’s best GPUs to address the opportunity, either through processors or licensing our IP.
The Tegra® SOCs serve the smart device markets where visual computing matters — from superphones and tablets to auto infotainment and driver assistance systems, to gaming devices.
NVIDIA latest processor, Tegra® K1, brings the heart of GeForce and the soul of Tesla to mobile.
As you can see, this company is truly on the bleeding edge of the overall visual computing trend.
The company’s sales in its automotive segment are on fire!
These sales are forecasted to hit $183 million this fiscal year. When you consider this division brought in just $23 million just 5 years ago, the rapid growth is incredible.
The company has reported that by 2020 it expects its chips to be installed in 32 million vehicles. Most bullishly, It has $2 billion of future sales already booked in the sector.
Believe it or not, despite the huge growth potential, sales from the automotive segment remain a very small portion of NVIDIA sales.
The company’s core profit center is video gaming. NVIDIA dominates 80% of this industry. It earned $661 million of revenue in the latest quarter in this segment.
Overall revenue for the quarter climbed 4.5% from same time last year to $1.15 billion, solidly trouncing estimates of $1.01 billion.
Adjusted earnings of $0.34 per share screamed 13% higher year over year crushing expectations of $0.10.
The company reported second-quarter earnings were up 5 percent year over year, mostly driven by growth in GeForce GTX GPUs for gaming PCs. That product line was up 51 percent year over year, even though built-in OEM graphics chip business was down. The company said it expects revenue to stay roughly stable for the next quarter and gross margins, currently hovering around 56 percent to 57 percent, to remain steady.
Since stock prices are anticipatory mechanisms, the future projections are extremely critical.
In NVIDIA case the fundamental projections are very bullish for the share price. In the upcoming fiscal third quarter, slated to be reported on November 5th, the company said it forecasts revenue in the range of $1.16 billion to $1.2 billion. Prior to the announcement, Wall Street had anticipated revenue of $1.1 billion for the quarter.
This performance has resulted in Morgan Stanley upgrading the company to equal weight and lifting its target by $7.00.
Venturebeat.com reported that Chief executive Jen-Hsun Huang said in the Nvidia earnings call that the company is optimistic about the upcoming year, with growth in games, hardware, and automotive applications.
“The second half of the year we’re going to see some really solid games,” he said, citing Call of Duty, Star Wars, Assassin’s Creed, and Metal Gear Solid releases. “4K (display TV technology) is here. Windows 10 is great. And the Skylake [chip] platform by Intel is going into production now. [Virtual reality] will go into production in the second half of the year. Each of these drivers are pretty large scale. My expectation is that gaming, and high-end gaming in particular, is going to grow nicely.”
Investors need to be aware of some bearish headwinds pointed out by NVIDIA.
The biggest negatives: The cost of the Shield console recall and restructuring costs after dropping its Icera modem line. Nvidia couldn’t find a buyer for that business.
In addition, the company paid $24 million in legal fees for its lawsuit against Samsung and Qualcomm, which also hurt the bottom line.
Shares have recently broken out of a multi-month channel creating an ideal buy opportunity right now.