Nvidia Emerges out of Trade-war Shadow
American technology companies have become pawns in the U.S.-China trade war. The great ones are adapting in remarkable ways.
Nvidia (NVDA) managers at Mobile World Congress last week in Los Angeles revealed the Smart Everything Revolution, a new platform to help companies build next-generation devices.
Platitudes aside, the reveal was Nvidia diversifying away from China. That’s a big deal.
Innovative companies like Nvidia are an American treasure. As the maker of best-in-class graphics processing units, its hardware became a staple inside early Microsoft Xbox and Sony PlayStation gaming consoles.
Engineers quickly discovered that CUDA, the underlying parallel computing software code, had wider applications for general computing.
CEO Jenson Huang moved quickly to exploit the opportunity. He partnered with leading technology companies to push GPU-based computing into other sectors. In 2006, he reached out to the academic community with software development kits and application programming interfaces.
This decision put Nvidia hardware at the center of a new computing movement.
Siemens partnered with Nvidia in 2007 to build the world’s first 3D ultrasound machine. Tsubame 1.2, a supercomputer built by the Tokyo Institute of Technology, became the world’s first GPU-based supercomputer in 2008. Three years later, the Tianhe-1A, a Nvidia powered machine based at the Chinese Academy of Sciences, became the fastest.
Sales soared as Nvidia GPUs moved into data centers, research facilities and universities, reaching $3.5 billion by the end of 2011.
Today, GPUs play a vital role in artificial intelligence. They are used in the development of everything from to communication networks to industrial robotics and self-driving cars.
This should be a good thing for Nvidia. Unfortunately, China and America are in the middle of a trade war.
Citing national security concerns, hardliners in the U.S. Senate have been pushing to permanently blacklist major Chinese businesses. Huawei, the world’s largest maker of telecommunications equipment, is among the most well-known. Currently, American companies need to get special waivers to sell their semiconductors, peripherals and software to these companies.
Currently, Nvidia logs 30% of its sales from China. And that’s why the Smart Everything Revolution is a big deal.
The Smart Everything Revolution is Nvidia at its best. Huang sees an opportunity to build a new computing platform at the edge of the network, where most of the data is created. Small boxes attached to light posts, buildings and communications towers will process timely information on the fly and bounce the rest of the data to cloud-based data centers. In theory, everything will become connected, or smart.
In essence, it’s the first step of the Internet of Things (IoT) revolution. It’s an adaptive, innovative solution, and it has the potential to do for the IoT what CUDA did for supercomputing.
It also comes at a time when politics make diversification away from China desirable.
The connective tissue would be the Nvidia EGX Supercomputing platform, a combination of cutting-edge hardware and software based virtual radio access networks.
It’s not a coincidence that Fredrik Jedling, CEO of Ericsson, joined Huang onstage in Los Angeles. The telecom equipment company has struggled to match Huawei in the race to build out cost-competitive 5G wireless networks.
The collaboration with Nvidia will help the Swedish company merge AI, the IoT and 5G networks. This combination should appeal to large telco companies looking to build new businesses models while remaining neutral in the trade war.
Nvidia shares used to be easy to recommend. Managers put the company in the middle of all the most exciting computing applications. For a time, the firm could do no wrong.
When cryptocurrency became a thing, and software developers rushed to building bitcoin mining rigs, naturally they turned to Nvidia GPUs. Almost overnight, a new $300 million business developed.
Bitcoin mining eventually succumbed to falling cryptocurrency prices. And more recently Nvidia has become a victim of slowing sales to Chinese data centers and the trade war with China. The stock is recently down to $200 from its 2018 high of $288.70.
It’s honestly too early to tell if the China data center woes have subsided. Nvidia will report financial results in November. However, what is certain is that Huang is moving the company to the edge of networks, while doggedly pursing the rest of the business.
Shares trade at 28.7x forward earnings and 12.7 sales. These metrics might seem high relative to other technology companies, but they are significantly below the historic norms. Huang has done a masterful job creating value for shareholders.
Even with the weakness from the highs, the average compound annual growth rate is 28.2% since that time. A stake of $10,000 would have grown to $654,353.
This is definitely a stock to keep on your radar. Growth-oriented investors can add it on pullbacks.
Jon D. Markman