How NVIDIA Is Leading the EV Revolution

Volkswagen spent $50 billion developing an electric vehicle to rival Tesla, Inc. (Nasdaq: TSLA). Then the German automaker discovered it had a software problem … it’s EVs didn’t work as expected.

Last week, Volkswagen announced the recall of 50,000 of its ID.3 EVs to fix software bugs. It’s an epic fail for a firm known for engineering excellence.

It’s also a big opportunity for an American firm to clean up in response.

Tesla managers got software right from the beginning. Shares have risen 24,801% since the 2010 initial public offering. Along the way, naysayers questioned everything from the viability of the EV market to Tesla priorities. Figuring out supply chains was way more important than fiddling with software, according to Tesla nonbelievers.

Years later, the EV market has taken off and skeptics are arguing that it’s only a matter of time before the real car companies swoop in to take way the fledgling market.

But the failings of the ID.3 tell a different story. Mastering the supply chain doesn’t translate into EV superiority.

The Wall Street Journal noted on Wednesday that the first wave of ID.3s have been besieged by hundreds of software bugs. To make matters worse, the over-the-air system that is supposed to fix those glitches doesn’t work, either.

Source: autocar.co.uk, Volkswagen’s ID.3

Ironically, Volkswagen’s supply chain prowess for internal combustion engine vehicles has become its EV weakness.

Power mirror and heated seat modules usually have their own microprocessors and static, task specific software applications. While these components plug-n-play easily with the computer on a four-cylinder Golf, integrating with the centralized operating system of the ID.3 is proving more problematic. Hundreds of smaller distributed applications are causing endless glitches.

Related Post: 4 Stocks for the New Age of Electric and Connected Cars

Volkswagen managers are scrambling for a quick fix. Thousands of ID.3s are being recalled. Technicians will manually upgrade the core software in February to VW.os version 1.2. A more mature version of the OS will not be ready until 2024. And even then, the company plans to outsource 40% of the code development to outside suppliers and third-party developers.

Unfortunately, bad habits die slowly in legacy businesses, even when managers understand they must choose a different path.

Volkswagen is willing to work around software from its suppliers because it reduces costs. Managers have decided the economics of integration outweigh potential benefits of complete in-house solutions, like the Tesla OS.

And that brings me to NVIDIA Corp. (Nasdaq: NVDA).

Ten years ago, the Santa Clara, Calif-based company had a nice but unspectacular business. It made best-in-class semiconductors for PC and console gaming. Then, CEO Jensen Huang saw the light … literally.

The software NVIDIA engineers developed to render light and physics for game graphics became the foundation for a new computing model based on artificial intelligence. Huang made the AI platform open source to entice academics and developers to buy-in.

The strategy was a huge success, moving NVIDIA hardware beyond gaming and into super computers and datacenters.

Meanwhile, company researchers were building algorithmic models capable of solving complex problems, like autonomous vehicles. In 2017, Huang showed off an AV computer that was no bigger than a lunchbox, but still capable of processing 320 trillion instructions per second and had enough power to process data from real time sensor streams then push everything up to the cloud for further analysis. Hundreds of development partnerships followed.

Today, NVIDIA has 370 partnerships within the automotive sector. Company engineers are working on AV technology with Volkswagen, Audi, Toyota, Hyundai, Volvo and Mercedes.

Related Post: Why the New Tesla Dream Is Battery Powered

I’ve never bought into the idea that legacy car companies would easily take market share from Tesla. They’re hardware businesses.

At its core, Tesla is a software business; a classic example of the great digital transformation of business and society. Making cars, as difficult as that process can be, was always the easy part. Designing good software is hard work.

NVIDIA is a hardware company that made the transition to AI software. And it’s in a great position to dominate big parts of the new automotive economy as its software/hardware solutions become the brains of many of the world’s best brands.

Shares trade at 47 times forward earnings and 23.5 times sales. These metrics are reasonable given the size of the opportunity ahead. NVIDIA has been trading sideways since September but should shake off its current funk before too long.

     

Savvy investors should look to buy shares using any near-term weakness.

Best wishes,

Jon D. Markman

About the Editor

Jon D. Markman is winner of the prestigious Gerald Loeb Award for outstanding financial journalism and the Society of Professional Journalists' Sigma Delta Chi award. He was also on Los Angeles Times staffs that won Pulitzer Prizes for coverage of the 1992 L.A. riots and the 1994 Northridge earthquake. He invented Microsoft’s StockScouter, the world’s first online app for analyzing and picking stocks.

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