Graphics processing chip-maker Nvidia has flown a bit under the radar in recent months, but it might be time for investors to wake up to its true potential
Something that I’ve not heard talked about in a long time is self-driving cars. We know that Tesla (NASDAQ: TSLA) and Alphabet-owned (NASDAQ: GOOG) ‘Waymo’ have taken the reins in this particular field, but what about the traditional car-makers? What about Ford (NYSE: F), General Motors (NYSE: GM), Mercedes, and BMW? Even Uber (NYSE: UBER) is banking on self-driving cars for its future business model.
What has this got to do with Nvidia (NASDAQ: NVDA) you might ask? Well, speaking of Mercedes and BMW, the former has just ditched the latter and struck up an all-in deal with Nvidia to create software-upgradable and autonomous vehicles by 2024.
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Mercedes is tired of playing catch-up with Tesla’s over-the-air (OTA) software updates and with Nvidia’s help, it hopes to replicate and improve on the Elon Musk-owned company’s designs — a feat which has stumped traditional car makers in the past.
Why is this a big deal?
In 2019, the German automaker’s brand value was $23.36 billion, putting it in the top 10 worldwide. It seems that Mercedes is willing to ditch a deal it made with BMW last year in favor of putting all of its eggs in Nvidia’s basket. The chip-maker will provide an undisclosed investment in Mercedes as well as its ‘DRIVE AGX Orin’ platform across all future Mercedes vehicles — as well as an undisclosed investment — which they plan to use to build upgradable software in new Mercedes vehicles and create “autonomously assisted” vehicles.
If you’re not sure what upgradable car software is, it is something Tesla has in all of their cars, and if there is an issue, rather than bring it to the shop, it will simply update overnight, like a smartphone. It is a huge deal for Nvidia which now gets a toe in the autonomous vehicle space, which many analysts estimate to be worth $60 billion by 2030.
For now, Mercedes has claimed it will be focusing on assisted automation trucks and semis, while ‘robotaxis’ will be further down the road. What’s more, the decision shows how quickly traditional car manufacturers are changing their views on autonomous vehicles.
What else is Nvidia up to?
At a time where rival chipmaker Intel (NASDAQ: INTC) is reeling from the loss of its lucrative Apple (NASDAQ: AAPL) gig, Nvidia is enjoying a relentless bull run. Since its March 16 lows Nvidia’s stock price has rallied more than 92%, hitting a new intraday high only yesterday.
This run began long before any deal with Mercedes was announced, which only represents a portion of its chip-making business that currently spans through computing, mobiles, gaming, and more. This led to a stellar Q1 earnings report back in May, which saw Nvidia’s revenue grow 39% YOY to $3.08 billion with EPS of $1.47. All this despite a global pandemic and — according to some critics — a lack of innovative new products from Nvidia itself.
However, bulls are now optimistic that Nvidia will make the most of the increased demand for at-home devices such as laptops as well as little expected competition from Intel in the lucrative realm of graphics processing chip (GPU) making.
So, is Nvidia a good investment?
With total revenue next year expected to rise to $13 billion from $11 billion in 2020, and no signs of slowing down, making money is not an issue for Nvidia. As well as that, its visionary founder and CEO Jensen Huang has been a great leader since its 1999 stock market debut, in which time its stock has grown close to 16,000%.
Though many bears have pointed to its reliance on gaming contracts — almost half of its revenue — the company’s deal with Mercedes shows it is willing to diversify. As well as this, the gaming industry is on the rise with a CAGR of 12% between 2020-2025, so being the leading chipmaker in such a lucrative industry should not be taken for granted.
With plenty of opportunities for growth still ahead of it in a massive tech sector, a rich pile of cash reserves — $8.9 billion pre-virus — and a business model that consistently beats the market, Nvidia is certainly a worthy investment.
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