Alphabet (GOOGL) is the Rodney Dangerfield of tech companies. It gets no respect. And as the market for AVs becomes apparent, Nvidia is set to be the biggest winner. In other words, this dip in the stock looks very attractive as an entry point, writes Jon Markman.
Waymo, its self-driving car subsidiary, announced Nov. 13 it will launch a fully autonomous taxi service in Phoenix in 2018 — years ahead of schedule.
Self-driving cars are real. And make no mistake, they are about to make investors rich.
There are plenty of autonomous vehicle skeptics. Thumb through any car enthusiast magazine, and you are likely to find a story about the limited scope of sensors and software. Dig further and you’ll probably find some anecdote about lack of use cases.
There is a vocal subset of people who love driving their cars. They feel threatened by AV technology, and they pretend it is not happening. But it is happening. According to Waymo, the revolution begins next month.
AVs are game-changing because the tech rejiggers the calculus of auto ownership.
Most people get up every morning. They eat something, grab coffee and make sure the kids are ready for school. Then hop in their car and head to work, alone.
That car will sit idle in the parking lot while they work, just as it sat idle in the garage when they were at home.
Cars mostly just sit idle. Urban planners tell us the average vehicle is parked 95% of the time.
AVs, especially when used the way Waymo plans, will dramatically boost utilization. It turns cars into people movers, sort of like airliners.
The appeal of paid flight has always been that the aircraft never stops moving people. Planes fly from one destination to another, pick up passengers and generate fees. Bringing this model to fleets of cars, minus the union labor costs, would change everything. And as the model becomes ubiquitous, costs per mile traveled would drop dramatically.
Owning a car for personal use makes no economic sense. Why pay for fuel, maintenance, insurance and parking when you could summon a vehicle with your smartphone, punch in the destination, hop in and go?
Sergey Brin, the co-founder of Google, figured this out years ago. He had a team of engineers start working on self-driving cars in 2009. Back then, most of the world was fixated on the iPhone and mobile computing. The skeptics thought Brin was crazy. AVs are decades away, they claimed.
Today, Google’s Waymo is miles ahead of the competition, literally. All of those years building models and testing algorithms means the company is racking up a million miles a month of AV data. In July, Waymo had 8 million miles — 5 million ahead of second-place Uber.
Investors are severely underestimating the size of this new market.
Morgan Stanley, the Wall Street investment research firm, in August estimated Waymo might be worth $175 billion. Four months earlier, the Los Angeles Times reported the fledgling company ordered 20,000 Jaguars, with an eye to converting the premium electric SUVs into state-of-the-art AVs.
However, the best way to play the emergence of AVs is not Google. It’s Nvidia (NVDA).
Nvidia shares fell almost 20% Wednesday night after giving weak Q4 revenue guidance. Could this be the buying opportunity many investors have been waiting for?
Ten years ago, Nvidia was a maker of high-end video cards for personal computers. It was a good business, but not spectacular. Then the company shifted gears. Managers realized that the complex math behind their software for rendering light and physics was really a new computing model.
Today, that platform is the basis for a type of artificial intelligence.
Using the power of Nvidia graphic processing units and conventional computing processing, researchers have been able to build models that learn how to solve complex problems at an exponential rate.
Nvidia has parlayed this stewardship into a gigantic new AI business.
AVs are the cutting edge. In addition to software, the company developed a computer brain for vehicles capable of processing 320 trillion instructions per second. If has enough horsepower to process data from a barrage of real time sensor streams, and push all of that info up to the cloud for further number crunching.
Google may get no respect from investors, but it is going to get to the AV market first. BMW, Daimler, Baidu (BIDU), Uber, Volvo, Volkswagen, GM/Lyft, Ford (F) and Aptiv (APTV) are all charging hard to catch up. All of these companies are Nvidia partners.
The stock just fell to around $165 from a high of $290 in October, despite 40% sales growth in fiscal 2018. The culprit was the company’s Q3 report, which showed Nvidia slightly missing revenue estimates even as profit topped them. The company also said cryptocurrency-mining-related revenue was somewhat weaker than planned.
But shares trade at just 25 forward earnings. And as the market for AVs becomes apparent, Nvidia is set to be the biggest winner. In other words, this dip in the stock looks very attractive as an entry point.
Best wishes,
Jon D. Markman
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