Nvidia: The Future of The Metaverse, Cryptocurrency, and Mobility
Long time readers of my content will know that I like two things when it comes to investing in public equities: steel and semiconductors. It’s no secret that I’ve been long SOXL, a triple-leveraged semiconductor ETF, with a 525% gain since March of 2020.
What people may not know is that over 50% of my portfolio is in Nvidia (NVDA). The reason is simple:
Nvidia espouses the future of several major trends that are set to dominate the technological landscape for years to come: the Metaverse, cryptocurrency, and mobility.
Company Overview
Nvidia was founded 28 years ago in March of 1993. Its founder, Jensen Huang, observed that gaming was one of the more complex computational problem with a massive commercial market. If they could innovate on graphical processing, they could dominate the burgeoning computer industry and use their success to fuel R&D into other markets.
The company began designing chips that would soon shape computing for decades to come. The original graphics card, the NV1, took two years to develop and could handle 2d and 3d video with audio processing software. They quickly innovated on this product, launching the Riva, Geforce, and Tesla models, and eventually began to dominate accelerated graphical computation, pushing gaming to unprecedented heights. In 2006, Nvidia invented a programming model that enabled multiple complex mathematical calculations to run in parallel, propelling its GPUs into cloud computing, AI, and data.
Interestingly, the company didn’t have a name before raising their first $20m of capital from Sequoia Capital. They kept using “NV” (“next version”) to name their files, and they eventually settled on Nvidia as a nod to “invidia,” the Latin for “envy.”
There is plenty to be learned from Nvidia’s origin story alone, but what’s most important is that innovation and R&D have been in the company’s lifeblood since its inception.
Business Model
Contrary to many other semiconductor companies, many of which have capital-intensive manufacturing costs, Nvidia solely designs and innovates as its core business. Of Nvidia’s 13,277 employees, 9,486 are engaged in R&D, and 3,791 are engaged in sales, marketing, ops, and administrative positions.
It outsources all production and manufacturing to third party vendors like Taiwan Semiconductor and Samsung. The information about these contracts and their respective margins are some of the most well-protected secrets in the industry, and while it is difficult to understand the nature of these deals, it should be noted that Nvidia de-risks the majority of its core business through these contracts.
Historically, Nvidia has used Taiwan for everything in the way of chip manufacturing, but as Taiwan adds customers like Huawei and strains their own capacity, Nvidia has added different manufacturers like Samsung in order to increase their capacity.
Why Nvidia Will Continue to Dominate
There’s no doubt that Nvidia has dominated the GPU space, and its stock has soared 50,000% since it IPO’d in 1999. The stock is up 450% since March of 2020.
Enough about their history and business model. Is it a buy? Let’s dig in.
The Metaverse
Even the most tangential to entertainment over the past year have heard about the metaverse once or twice. What people may or may not know is that Nvidia is powering the space.
Beyond metaverse gaming endeavors like Fortnite, in which Nvidia largely dominates the 180 million PC players, Nvidia is gobbling up market share in cloud computing, and Huang predicts they will own 90% of the market within 3 years. As GPU power increases, the more simultaneous computational processes can be performed, and the potential of this development is limitless when combined with increased connectivity.
Nvidia software development kits have been downloaded 20 million times, and is actively being used by 2 million developers across 6,500 startups. Nvidia even launched Canvas in beta, allowing even the most artistically challenged to create stunning 3D landscapes.
Even more interesting is Nvidia’s Omniverse, a platform designed to bring the metaverse forward. Omniverse allows users to collaborate on world-building in real-time, leveraging the power of their GPUs alongside their Physx engine and architecture. The result is photo-realistic worlds in which, per Huang:
“In the future, we will be in a metaverse right now. It will be a communications metaverse. It won’t be flat, it’ll be 3D. And we’ll be able to almost feel like we’re there with each other. It’s how we do time travel. It’s how we travel to far places at the speed of light. That’s how we go backwards in time. That’s how we go forward in time. Going forward in time is to simulate the future.”
If you believe that the metaverse is an inevitability (I do), you must consider allocating dollars to the company leading the charge behind the scenes.
Cryptocurrency
Nvidia has long understood the value of cryptocurrency and how their GPUs fit into the mining landscape. After launching a new CMP (cryptocurrency mining processor) in February, the company sold $155 million in chips.
Huang has also predicted that the future of the metaverse will be crypto-enabled, as digital ownership is made scarce, and thereby valuable, by the existence of NFTs.
Huang has predicted that this business unit has the potential to reach $400m as cryptocurrency becomes more mainstream, and he’s even nerfed GeForce card hash rates in order to drive down cannibalization of other products.
Crypto mining is getting more difficult, and simple GPUs can no longer compete with more complex systems, forcing those that want to stay in the game to rely on innovation in the space and top-notch GPUs to compete. Nvidia is a clear leader in this industry, and the new leaked card could easily sell for over $10,000.
Mobility
A Chevy Volt utilizes over 10 million lines of code (a Boeing 787 only uses 6.7m), and these increasingly complex systems require innovation outside of traditional GPU development. This doesn’t include the massive lift required to pull off automated driving’s computer vision and AI processing needs.
Thankfully for commuters, Nvidia is expanding rapidly into this business. In Nvidia’s classic style, they are using hardware as the Trojan horse into autonomous vehicles, putting the Drive platform on market and integrating it with their best-in-class visualization and toolkits to enable unprecedented sensor perception and mapping.
Beyond autonomous vehicles, Nvidia is tackling many other tangential areas as well, providing a collaborative platform for robotaxis, trucking, and last-mile robotics delivery. The future of mobility is one powered by AI and computer vision, and as once predicted by Jensen Huang, gaming-led innovation has been the flywheel into many real-life markets as well.
Risks
First of all, the stock is at all-time highs and expensive at 95x P/E, and this is always important to take note of, no matter how much momentum a company has.
There is a lot of growth priced into this company already, with a potential merger with ARM as well as successful integration of Mellanox on the horizon. Wall Street expects this company will grow rapidly in visualization, graphics, and data centers.
Government delays in approving the merger or any market hiccup could send this stock lower quickly as they fail to reach growth targets (much in the same way the stock suffered in early 2020). There is also strong, continuous competition from AMD, as well as semiconductor shortages that are affecting all industries.
Conclusion
A longer piece would talk about data centers, AI, visualization, and many other profitable areas for Nvidia, but the above covers the markets that Nvidia has only begun to scratch the surface in terms of monetization.
The company’s expansion into data centers, pro visualization, and autonomous vehicles has all paid off with double digit annual growth of 52%, 21%, and 26%, respectively. R&D is the name of the game, and Nvidia has consistently demonstrated the ability to innovate and develop the technology of the future.
Is the stock at all time highs and expensive? Yes. It’s certainly easier to write about a company when my cost basis is 5x lower, and I would certainly wait for a pullback before buying at this level. That said, the potential merger with ARM, the proposed stock split, and the many catalysts in these spaces, there is plenty of room for the stock to continue higher.
In the words of Jensen Huang:
“If the last twenty years was amazing, the next twenty will seem nothing short of science fiction.”
