We’re sitting here scratching our heads when we see that in 2016, the single best performing stock in the S&P 500 was NVIDIA Corporation (NASDAQ:NVDA) with the NVDA stock price seeing a +224% increase in 2016. Why are we so puzzled? It’s because we believe in the “efficient market hypothesis“. Allow us to explain.
There’s this notion in finance called the “efficient market hypothesis” and while that may sound terribly boring, what it actually means is this. For any given company on the stock market, all the relevant information about said company is already incorporated into the share price. This is why you see dramatic swings in share prices when earnings come out. Earnings releases bring new information which is then priced in causing share price movement. If the market was expecting the news, then you shouldn’t see much share price movement. This is why large cap stocks rarely see volatile price movements.
Prior to 2016, NVDA had actually underperformed the S&P500 over a 5-year time frame. So… why did the NVDA stock price increase so dramatically in 2016? What on God’s green earth could have made such a big company outperform the S&P500 by that much? The answer is found in the below charts:
You don’t need to have a PhD in Finance to understand that when your revenues grow by +31% and your earnings per share grow by +71%, investors are going to be very pleased. All the financial metrics above explain why Nvidia had a great year in 2016. The driver behind this growth was that Nvidia has successfully reinvented itself from a graphics chip company to a graphical processing unit (GPU) computing company.
In NVDA’s most recent investor presentation, the first slide immediately points to 4 multi-billion dollar GPU computing growth drivers — gaming, VR, AI, and self-driving cars. If you’re interested in having exposure to emerging technologies, that business focus should make you all ears. Here’s why:
- Gaming – It’s incredible to realize that the $100 billion computer gaming industry is the largest entertainment industry there is and “professional gaming” was one of our 9 jobs for the future. Nvidia builds the video cards needed for computer gaming and this space is only going to grow in popularity with the emergence of virtual reality.
- Virtual Reality – Just put on a high-end virtual reality headset like the Oculus Rift. You’re going to realize that in the not-so-distant future, kids will laugh when we tell them we used to play games through a small window called a television.
- Artificial Intelligence – We wrote before about how we consider NVDA to be the closest thing there is today to a pure-play “picks and shovels” bet on the future of artificial intelligence.
- Self-Driving Cars – This is just icing on the cake as all kinds of autonomous vehicles will need the type of hardware that NVDA builds. They just unveiled a self driving supercomputer alongside newly announced partnerships with Audi and Bosch.
Every single one of these areas is attractive to an investor who wants exposure to emerging technologies, but just how does this exposure break down in terms of revenues by segment? Let’s take a look at how 2015 revenues for NVDA compared to their most recent quarter’s revenues annualized:
Last quarter earnings for NVDA are telling. The filing cites “increased revenue from sales of high-end GeForce GPU products for gaming reflecting a combination of continued strength in PC gaming and strong demand for our recent Pascal-based GPU products“. You know what those high-end GeForce GPU products are used for? Virtual reality. You’ll recall when we bought our VR set over Christmas that we had to buy a new computer with an NVDA GeForce card to run our Oculus. The same filing also cites “datacenter revenue, including Tesla, GRID and DGX-1, increased 193%, reflecting strong demand for deep learning training, Tesla and GRID for cloud and virtualized computing, and initial DGX-1 sales“. If you recall from our previous article on NVDA, the DGX-1 is “the world’s first AI supercomputer in a box“. It’s a hardware device specifically built for deep learning and they’re only beginning to sell it just now.
NVDA stock price skyrocketed in 2016 because all the institutional investors realized throughout the year that Nvidia isn’t just a graphics chip company. They’re a company that is powering some of the most exciting emerging technologies we see outside of genomics. (BTW, if you’re a believer in genomics and you don’t own Illumina shares, allow us to change your mind). If you’re a believer in virtual reality, augmented reality, and artificial intelligence and believe like we do that these might be some of the biggest opportunities ever, then you can’t afford not to own shares of NVDA. Sure, you can buy shares in Google and invest in every technology they have but the truth is, there are not many large-cap stocks out there that give you this kind of pure-play exposure to exciting emerging technologies like VR and AI.
We picked up some NVDA shares last year but only a small position. Now we’re kicking ourselves for not buying more (as one does). The best thing to do here is to accumulate a position over a longer period of time to avoid market timing. Want a 5K position? Just buy $416 worth of shares per month throughout 2017. You’ll avoid any market timing mistakes and remove the emotional element from the equation.