The NIVDIA Money Machine Keeps Rolling

The NVIDIA Corporation (NASDAQ: NVDIA) is no longer a humble chipmaker, instead it is a moneymaking machine.

NVDIA’s year-to-year revenues grew by an astounding 65.57% between 2nd Quarter 2017 and 2nd Quarter 2018, Stockrow data indicates. NVDIA reported revenues of $1.173 billion for 1st Quarter 2017 and $3.207 billion for 2nd Quarter 2018.

The revenue boost gave NVIDIA a gross profit of $2.068 billion, an operating income of $1.295 billion and a net income of $1.244 billion for 2nd Quarter 2018. That led to an operating cash flow of $1.445 billion and a free cash flow of $1.327 billion for the quarter.

It also put a lot of money in NVDIA’s bank in the form of $7.3 billion in cash and short-term investments. That’s utterly incredible for a company with total assets of just $11.460 billion. Such figures might make NVDIA the best company in America from a value investing standpoint.

Is NVDIA now the best Company in America

It is easy to see why NVIDIA stock was trading at $264.87 a share on 4 June 2018. NVIDIA is one of the few manufacturing or technology stocks that actually offered a high rate of revenue increase.

NVIDIA is worth the $264.87 a share because it delivered a return on equity of 28.91 for 4th Quarter 2017, and 13.42 for 2017, Trading Economics reported. To add icing to the cake, NVIDIA paid a dividend of 15¢ a share on 10 May 2018.

The dividend is rather low, but NVIDIA has been paying one each quarter for the past several years which is astounding for a tech company. I can think of some great tech companies including Facebook (NASDAQ: FB), Alphabet (NASDAQ: GOOG), and PayPal (NASDAQ: PYPL) that do not pay dividends.

This makes NVIDIA a value investment because it pays a dividend and generates a lot of cash. NVIDIA is also an infrastructure company because it manufactures chips rather than software. What is more extraordinary is that NVIDIA might soon get better.

NVIDIA’s Plan to Make More Money from the Cloud

The next money-making frontier for NVIDIA is the cloud. The company’s new superfast HGX-2 chips are made to operate artificial intelligence (AI) in the cloud.

The HGX-2 contain 16 advanced graphics processing units (GPUs) that are designed to handle a wide variety of advanced AI tasks in the cloud, The MIT Technology Review reported. A major use for the HGX-2 is to operate AI data software in data centers and the cloud.

The potential market for the HGX-2 is vast because there were 390 web-scale data centers worldwide in December 2017, TechCrunch reported. That number increased by 90 to 390 in 2017 and it is expected to increase by around 100 again in 2018.

There are currently 24 hyperscale firms giant data-oriented companies like Alphabet (NASDAQ: GOOGL), Palintir, Tencent Holdings, IBM, etc. each of which operated around 16 data centers a piece, TechCrunch calculated. The average large datacenter contained around 5,000 servers.

There will be around 500 “hyperscale” datacenters; facilities with several thousand servers up and running by 2019, Synergy predicted. The extraordinary aspect of all this is that datacenters are the tip of the iceberg.

How NVIDIA will make money from Grocery Delivery

Beyond them are logistics, manufacturing, video, blockchain, and self-driving vehicles. Logistics for services like grocery deliveries will need vast numbers of processors like the HGX-2.

Britain’s Ocado Group PLC (LON: OCDO) plans to build dozens of its Customer Fulfillment Centers (CFC3s) around the world. Each CFC3 will use the cloud to operate hundreds of robots that will pull online grocery orders for home delivery.

The first operating CFC3 in Andover Hampshire, employs 1,100 robots and contains its own datacenter. The CFC3s will be operated by the Ocado Smart platform which combines AI, predictive analytics, machine learning, and agile processes; in other words, big data operate. Big data is needed because the Andover CFC3 contains 50,000 items and is the size of three football fields.

Every CFC3 will need dozens if not hundreds of chips like the HGX to operate and Ocado wants to build them everywhere. American grocery giant Kroger (NYSE: KR) has plans for 20 CFC3s in the United States. Beyond America, Ocado has signed agreements to build CFCs for Sweden’s ICA, France’s Groupe Casino, and Canada’s Sobeys.

Ocado is just one of many online retailers, Amazon (NASDAQ: AMZN), Walmart (NASDAQ: WMT), Alibaba (NYSE: BABA), Flipkart, Target (NYSE: TGT) and others are planning their CFC3 type fulfillment centers. Each of those fulfillment centers will need tons of chips, guess who is most likely to supply them.

Are GPUs the Oil of the 21st Century?

It is easy to think of GPUs as the oil or steel of the 21st Century, that is the basic material that the new economy operates on. The great fortunes of the late 19th and 20th Centuries were built upon oil and those materials.

Andrew Carnegie made his money from steel, the basic building material of the industrial revolution. Oil made John D. Rockefeller the world’s richest; and most hated, man. NVIDIA might be sitting on a similar money machine that might yield comparable riches.

The same AI that operate fulfillment centers can also run factories, self-driving vehicles, mines, smart grids for energy delivery, railroads, traffic control systems, smart cities, and next-generation transportation solutions like the Hyperloop.

Companies like Aitheon and SyncFab are trying to develop AI and remote-operator solutions for vehicles, industrial machines, and robots that will let anybody anywhere operate machines through the cloud and the blockchain. Such solutions will require a vast amount of GPU power that NVIDIA will help supply.

NVIDIA’s GPUs are critical to vehicles like drones and self-driving cars because they can process up to 15,500 images a second. That enables the vehicle or its operator to see.

Processors like the HGX-2 will be critical to Aitheon’s success because the company wants to enable ordinary people to operate autonomous vehicles and robots by remote control. Those machines will need GPUs so the operators can see the what robots or vehicles are doing in the field.

It goes without saying that such image-processing ability will be critical to remote controlled equipment like that planned by SyncFab or Aitheon. Something like the HGX-2 will be critical for SynFab’s system because it would allow a machinist to see what a machine is doing in real time. That might allow a machinist sitting in his living room in Peoria to operate machines anywhere on Earth.

Does the GPU Rush Threaten NVIDIA?

The greatest threat NVIDIA faces are its own financial numbers; competitors and potential competitors will see them and join the GPU rush. Everybody and his dog will be trying to manufacture GPUs or investing in them.

That means NVIDIA will face vast amount of competition so its days of market domination might be short. Even if that competition comes, NVIDIA will still make a vast amount of money because it is the gold-standard in GPUs and shall be for some time.

More importantly, NVIDIA verifies the old-value investing wisdom of do not buy the hot company of the moment. Buy the company that supplies the raw materials that the market favorite needs to stay in business. In today’s world that company is NVIDIA, and it is proving that value investment still works in today’s digital world.