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URL:  https://boards.fool.com/there-are-plenty-of-negatives-about-the-company-32745260.aspx

Subject:  Re: NVDA - 2nd thoughts, or maybe 3rd Date:  6/13/2017  8:45 PM
Author:  XMFBreakerTinker Number:  28807 of 56062

There are plenty of negatives about the company, just none of them as Denny specifies "Barbarians at the Gate".

Unlike perception on this board, and by most, NVDA really has little to no real competition. Gasp! {goes the crowd}. The conventional wisdom comes out and says, "they are a chip company...a chip company...and they have no recurring revenue!" Yeah, whatever.

Don't believe me, look at NVDA's margins and ROIC. There are few companies in the entire world of this size that have similar margins. Wait...I know two...QCOM and INTC. And yes, it can be said that neither QCOM nor INTC have any real competition either. Gasp! {goes the crowd again} Intel has AMD, QCOM has Samsung and multiple others! Really? On the margins, that is about it. Neither Intel nor QCOM have any competitors that are threatening their market dominance, their ROIC, or their margins.

Similarly NVDA has no competitors. Like with INTC, NVDA has AMD. AMD is really the only competitor to INTC's x86 chip architecture that runs PCs, and AMD is the only competitor (of any volume) to NVDA's GPUs. Look at AMD's margins, 50% or less of the margins that INTC and NVDA have, and yet THEY ARE IN THE SAME BUSINESS! In fact, although it is hard to prove, AMD is said to have the finest chip designers in the world. Who cares.

You buy AMD if you don't want to pay the Intel tax. As soon as AMD comes out with a chip good enough to steal material marketshare from Intel, Intel drops its prices, picks up its R&D, and AMD cannot keep up with the product cycle, and simply cannot provide the whole product (that goes to more than just new hardware chips, but software, support, packaging, and all the other things that go into high volume "commodity" {not} chips). To make matters worse, INTC controls the x86 architecture, and each new generation changes things. You can run an emulator, next generation you need a new emulator to emulate what INTC is doing.

AMD tries the same with NVDA, particularly in the gaming market. Even here, AMD cannot keep up with NVDA. NVDA controls the high end, the place where real profits exist, and AMD cannot keep up with each new product cycle. To go further, eSport, as an example, is growing into the largest sports in the world. With more people playing eSports (and growing) than any other sport in the world, and by far I think. NVDA is a lead sponsor of eSports, and is as branded in eSports and gaming graphics as Intel is with "Intel inside".

It is so bad for AMD, that even good news is bad news. AMD's latest GPU chip for gaming is selling out, you cannot find it except on the "black" market. Why? It is the best chip for a specific sort of bit coin currency. Problem though. AMD and everyone else knows that this demand, for this use, is transitory (it will end when the mania for this particular currency ends, or an ASIC is developed (if it becomes a more long term demand source). But is AMD ramping up production to meet this demand? No. Why? AMD does not want to get stuck with the inventory. In the meantime, instead of these chips being used in gaming, there is no supply of these AMD chips to be used in gaming. Thus, even those who want to use an alternative to NVDA GPUs for gaming, they are turning to NVDA - growing NVDA's marketshare and brand. AMD cannot win by trying sometimes. And they have never been able to.

That is but one market for NVDA. NVDA dominates this market like INTC dominates the PC market. More than 70% of NVDA's current customers are using legacy GPUs that will inevitably be upgraded, particularly as AR, VR, and gaming grows. Even the gaming market has long-term growth for NVDA.

Other markets are AI and autonomous driving. There are several segments to these markets that I won't go into. suffice to say that Nvidia is the leading autonomous driving technology enabler in the world. No one disputes this. NVDA is in every Tesla out there, and Tesla, if it sticks to its plan, is 2 to 3 years ahead (at least) of any competitor. And TSLA has the most partnerships in the industry. NVDA's position on this (and it makes sense) is that once TSLA shows what is possible, that not only will their partners (the most and most important) stay with them and want to accelerate their programs, but that the entire industry will move towards NVDA and the single proven working autonomous solution in the world.

Sure you have INTC with Mobileye (paid $15 billion for MBLY), and is behind and desperate to catch up and already filing millions of dollars of commercials promoting AI and autonomous driving.

You have Waymo, owned by Google, and Morgan Stanley saying it will have a $70 billion market cap if it IPOs (despite no real customers, no real product, and current product $10s of thousands of dollars too expensive for any mass market). Dubious.

But if correct, what value to place on NVDA's autonomous driving platform alone?

AI. NVDA has a near monopoly on GPU chips used for training machines in the AI functionality. A little less, but roughly equivalent to INTC's 99% marketshare in server chips (where is AMD!). Part of what makes NVDA so powerful in training, actually a few things (1) ASICS and CPUs are not good at training machines. They cannot compete in this function, and no one else makes GPUs that can compete with NVDA in the data center. giving NVDA an incredible competitive position in the data center, (2) CUDA.

CUDA is basically the equivalent (a little different but close enough) of x86 to INTC. the AI programming universe has standardized on CUDA, just like the PC market has on x86. As such, you cannot just make an equivalent or slightly better per cost GPU chip, and hope to gain marketshare on NVDA. Just as you are either going to buy a Windows computer, or a Chromebook, or a Mac, your not going to buy a PC, based just on price, in an operating system that you don't want or use.

I am not alone with this, it is well known in the industry, in fact there are professional boards discussing this very issue of "how did we let a proprietary software system to become standard in our industry!" It is not like the industry wanted to standardize on CUDA. They just did.

There is an alternative to CUDA, it is an open source language. Guess who maintains it? NVDA. NVDA chips run CUDA, but NVDA maintains this alternative. This is what AMD chips run. And from the talk in the industry (again, from many sources, but also from professional sources) this open source language is just fine, it works great. However, it usually take a year or so to receive updates, and does not have the same power as CUDA, at least not easily.

Here is a random piece on CUDA from a Hewlett Packard researcher. This is just random. But read about his opinion of CUDA: http://www.nvidia.com/content/cuda/spotlights/gpu-accelerate...

Shocking! HP sells many a CUDA powered server with NVDA GPU chips in them.

I will stop there on the good. There is a heck of a lot more that could be said. As for negatives:

(1) although GPUs are unchallenged in training, GPUs are not unchallenged in executing AI once trained. Google, as an example has in-housed its own TPUs to run AI execution, and these ASIC chips, run their specific function better and faster than GPUs can. An ASIC, however, is designed for a very specific task, where as a GPU (like a CPU) can be used for general tasks and more flexibly programmed to do multiple tasks. NVDA is fighting to win this execution market of the AI. It is quite material. There is no guarantee that NVDA will win this market.

(2) autonomous vehicles. There is an open question as to how much $s NVDA gets get autonomous car. I don't know. It is either enormous, or meager. I hope people out there can help me. The autonomous driving industry is also inevitable but who knows how it will play out. If it plays out like Elon Musk thinks it will, NVDA will remain the leading vendor in the world.

Can Google compete (they are almost not competing in the same market). NVDA, with Musk, is out to create a car that can drive itself 10x, 100x better than a human can do (but not perfect), but alway better than humans can drive. Google is building a car that will never, ever, crash or make a mistake. Its equipment costs more than $70k per car at this point in time (yes, will come down with scale, but that is a long way to come down).

INTC is perhaps a stronger competitor with Mobileye. But Tesla dumped Mobileye (or vice versa - who cares, obviously Tesla did not need Mobileye), and second you are competing against INTC, which has sat on its x86 monopoly for decades, and has had to make more than $30 billion in acquisition of two companies, just to have product in the AI market. The standard line in the brokerage world is that turning INTC is like turning a huge sea going vessel. Take a long time, but once you get it turned around...not actually the recipe for a flexible and heated competitor, but we shall see.

(3) the edge. NVDA obviously has an advantage on the edge in automobiles. But what about in other products? NVDA is mostly ahead of everyone here as well, with product, and they continue to produce product, but mobile edge products are a very nascent thing. Some say that NVDA's dominance in the automobile will lead to competitive advantages in other edge products such as IoT (Internet of Things) or in drones, planes, boats, trucks (another place NVDA is a leader - not sure if THE leader), robots, who knows what.

Here, Apple is showing interest in competing. And we still do not know what Apple is doing in in autonomous vehicles (other than everything is currently vaporware, and as I was upset with again today, Siri still really is not that good).

So not really negatives, but challenges going forward, uncertainties going forward. NVDA has margins and ROIC that you see only from "monopolies", not from nefarious means, but due to the structure of the market. Whether it is path dependency, or product architectures that get standardized on, branding, scale, speed of product cycles, whatever, NVDA has it.

NVDA is still owned and run by its founder (6% holding still and not selling. This is his baby), and is one of the best managed businesses that I have ever seen, bar none.

Because of this, I am quite comfortable buying and holding NVDA. It is a fascinating company to follow, a fascinating industry to follow, so I will stay on top of things, but the company itself, is a rare company. It really has no real competition, anymore than AMD was for INTC. Unlike INTC however, where no one could imaginable upset their x86 monopoly once it was set, NVDA has similar advantages, but does not mean that better solutions cannot be found and gain material marketshare (but it won't be AMD).

I am not one of those who sees a few day of a down market and goes buy, buy, buy. Ridiculous. Stock markets move on longer cycles. Look at the 52 week highs and lows, a bit more than 5-10% differentiates the highs from the low, and these swings do not happen in a linear fashion. So I don't play that game, but from a business perspective, NVDA is a rare company. I have used the term Gorilla in the Geoffrey Moore sense largely because of CUDA. But as you can see NVDA has multiple competitive advantages, and multiple markets where it holds a 70% or greater marketshare.

Tinker
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