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How To Think About Recent Volatility in Tech

How To Think About Recent Volatility in Tech

Market decline does not change the mega growth opportunities. The heart rate of the market increased the past week because of fears of a trade war, Facebook data privacy, and broken market technicals, but the health of the market is unchanged and the health is good. Core underlying tech trends including artificial intelligence, robotics, big data, and autonomous transportation, will support continued growth.

Hold tech for the long-term. We believe that tech is essentially taking over the rest of the economy; therefore, investors should hold tech long term. Just as every company is now an internet company to some degree, we believe that eventually every company will be an AI company.

Market undervalued. From a valuation perspective, our view is undervalued. The market has rallied back to the old highs, but the S&P is up only 3% per year over the past 17 years, compared to the previous 17 years (1983-2000) when it was up 17% per year.

Putting the size of tech into perspective. The tech sector’s growing clout is not just a U.S. story. Tech stocks have become so dominant in emerging markets that for the first time since 2004, the industry last year overtook finance as the biggest sector in the MSCI Emerging Markets Index. Tech had a 28% weighting near the end of 2017, more than double its level six years ago, according to data provided by MSCI. Facebook, Amazon, Netflix Inc. and Alphabet together account for a 7.8% weighting in the S&P 500, more than double from five years ago.

Company Updates:

Tesla. We remain positive on TSLA. Shares are down 20% in the past month mostly due to fears of another miss in Model 3 production. The recent stock dive is due to a combination of a Model X accident that is being investigated, Waymo’s partnership with Jaguar, which legitimizes a key competitor (the I-Pace electric SUV), growing concern among all companies testing self-driving vehicles amid the Uber fatality, and news that Moody’s has downgraded Tesla’s bonds to B3 from B2, citing significant shortfall in the Model 3 production rate and a tight financial situation. We continue to believe the Tesla story has the best risk-reward among tech companies over the next 5 years.

  • Model 3 production. We’re expecting another miss in Model 3 production in the March quarter but that does not change the story. There is more demand than supply for the Model 3 (about 400k preorders which is unheard of in automotive). It might take a year, but eventually, Tesla will get the Model 3 production right, and ramp output.
  • Model X accident. We see the recent Model X accident the same as accidents with gas cars. It is unlikely that the battery or Tesla’s advanced cruise control “autopilot” were to blame. Tesla disclosed that the autopilot feature properly functions 200 times a day on the same stretch of road where the accident happened.

Facebook. Limited upside to FB. Given the privacy issues, for the first-time advertisers have to think about Facebook as a liability. Separately, it’s unclear about how the recent privacy changes will impact Facebook’s ability to make money.

Nvidia. We remain positive on NVDA. Shares of NVDA dropped 11% in the past week following the announcement that they temporarily stopped autonomous testing, and in part because of the broader market sell off. While the company did not comment on timing, we expect testing to resume in the next 3 months. The big picture is the company is well positioned to capitalize on four mega trends, AI, autonomous cars, gaming, and blockchain through their dominance of GPU processors.

Apple. We remain positive on AAPL. Concern is emerging that iPhone demand in June will fall below Street expectations. We think iPhone demand over the next two quarters is not important to the story. What’s important is the share buyback, services, and the next iPhone.

  • Share buyback. Apple can add 4% per year to the stock price (assuming they use $40B of the $55B they generate in cash each year to buy back stock). Apple will give an update on the share buyback when they report the March quarter, likely late in April.
  • Bigger screen iPhone this fall. We expect Apple will announce a 25% bigger phone in the fall. This will be a positive for unit demand and average selling price.
  • Services. Services account for about 15% of revenue and are growing at 15-20% year over year. We believe this segment will continue to grow at a 15% or better rate over the next five years. This is important because the earnings multiple on shares of AAPL will likely increase as investors view the predictability of services are more attractive.

Google. We remain positive on GOOG. We expect the next six months to be rough for shares of GOOG as questions emerge about how the company uses data. Despite that negative potential, Google is too tightly woven into the fabric of the internet. The company is one of the best ways to invest in AI, given the company has a stated their intention to move from a mobile-first company to an AI-first company over the next several years. Lastly, the company has a stake in Waymo, the leading autonomous car company. We expect years of positive news to come from Waymo.

Amazon. We remain positive on AMZN. The company is best positioned for the future of retail. We see that future as a combination of both online and offline retail. Online sales account for about 15% of global retail, and in the future, we believe it will eventually reach 55% of sales. We also expect Amazon to do more with physical retail locations and we continue to believe the company will eventually acquire Target (TGT). The company’s AWS web hosting business is only 15% of revenue, but it is growing at greater than 30% for the next several years.

Twitter. Limited upside to TWTR. About 14% of Twitters 2017 revenue came from selling data, growing at 18% y/y, compared to Twitter’s ad business that declined by 6%. Selling private data is a toxic label, and this could limit the upside to shares over the next year.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Amazon, Apple, Artificial Intelligence, Facebook, Google, Nvidia, Retail, Robotics, Tesla
4 min. read Show less
Nvidia; Buy More GPUs, Save More Money

Nvidia; Buy More GPUs, Save More Money

  • NVDA shares dropped 8% today on the announcement they temporary stopped autonomous testing and market sell off.
  • While the company did not comment on timing, we expect testing to resume in the next 3 months.
  • CEO Jensen Huang held a keynote today. The message was more GPU’s save money.
  • The company announced 5 new products targeted at AI, autonomy, and VR.

Nvidia started its GPU Technology Conference on Monday with their focus on AI & Deep Learning. On Tuesday, CEO Jensen Huang gave a keynote on Nvidia’s latest developments in a few key product categories, but Nvidia’s stock dropped by 8%. We attribute 2/3 of the decline to the company announcing they’ve temporary stopped autonomous vehicle testing until they receive a diagnostic report from the Uber accident last week, and 1/3 from the broader tech sell off.

Buy more GPUs, save more money. The message from Jensen Huang was if you buy Nvidia’s GPUs, you can save money. The idea is using an Nvidia architecture requires less hardware that consumes less energy.  That said, users of these systems are solving more advanced problems like AI, which will require an increase in total spending. We remain comfortable with our Nvidia revenue growth estimates of 31% in CY18 and 21% in CY19.

New Products. Nvidia made product announcements today:

  • RTX (AI and blockchain). On the workstation front, the company announced the Quadro GV100 with (real-time ray tracing) RTX Technology. The RTX technology offers a measurable improvement in rendering times.
  • DGX-2 (AI and blockchain). Nvidia also announced the DGX-2 platform for AI. The DGX-2 claims to be the first to offer 2 Petaflop single server deep learning system. Nvidia compared this platform to a traditional hyperscale center, which would have 300 dual-core CPUs and cost about $3M. The DGX-2 is may seem expensive at $399K, but it takes up 1/60th of the space and consumers 1/18th of the power.
  • Isaac SDK (AI) Adding artificial intelligence to robots for perception, navigation, and manipulation. Nvidia showed a video of one of its first Isaac projects, a two-wheeled delivery robot named Carter.
  • Drive Orin (Autonomy). Drive Orin is comparable to two Drive Pegasus supercomputers while being smaller in physical size. Jensen shared that many customers were including two Drive Pegasus chips in each vehicle, and it made sense to package the same computing power into one product.
  • Drive Constellation (Autonomy). This is a datacenter solution used to test and validate self-driving vehicles in virtual reality.
  • Project Wakanda (VR). See details below.

Nvidia committed to an autonomous future. Given the Tempe accident, Jensen spent most of the self-driving segment of the keynote talking about the importance of safety, and why fully-autonomous future means safer transportation. He also reiterated this his belief that self-driving cars are “probably the hardest computing problem that the world has ever encountered”.  The company did not give a timeline of when testing will resume, but given the hold is based on the Uber review, we would expect it to take a few months. Autonomous simulation will play an increasingly important role in the future. Drive Constellation can run thousands of virtual worlds, each while running thousands of scenarios in order to collect more data. For example, 10,000 constellations can simulate about 3 billion miles in a year, significantly more than 5-10 millions driven each year by the current fleets of test vehicles.

Project Wakanda hints at the future of relationship between man and machine. Nvidia closed the keynote by unveiling what has been dubbed “Project Wakanda.” Similar to what we saw in Black Panther, Jensen showed a driver operating a vehicle in virtual reality, while sitting in a fully-equipped cockpit. Next, a third screen appeared and showed a driverless car at a remote location.

While Nvidia didn’t share much about its direction with this project, Jensen did share that he views virtual reality as a way to provide humans with teleportation – augmented with autonomous machines.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Artificial Intelligence, Autonomous Vehicles, Nvidia, Virtual Reality
3 min. read Show less
Apple Education Playbook: Hardware, Software, Services… and Creativity

Apple Education Playbook: Hardware, Software, Services… and Creativity

  • Apple announced an updated iPad along with a suite of programs that enable educators and students to pursue creativity, which is critical in the future of education.
  • We estimate education accounts for 10-15% of Apple’s business. We believe today’s announcements will have a small impact on their education business, but an immaterial impact on their overall business.
  • Apple emphasized augmented reality as an important aspect in the future of education. Greg Joswiak added, “there’s no doubt that AR is going to dramatically change the way this generation learns.”
  • Our research suggests iPad is strongest in K-5 and Chromebooks are preferred 6-12. We don’t think today’s announcements change that dynamic.
  • The new iPad is priced essentially the same as its predecessor but adds the A10 Fusion chip and Apple Pencil Support. This essentially now competes with the $649 10.5″ iPad Pro.

We attended Apple’s education event today in Chicago. It’s been 6 years since Apple has done an education-focused event, which means the company had a lot to talk about related to its efforts in education that we estimate to account for 10-15% of Apple’s overall revenue. The main takeaway from today’s event is that Apple has a suite of hardware, software, and services that can be used by students, teachers, and administrators to optimize the education experience. At the core, is Apple’s belief that creativity in music, video, photography, and drawing can be a framework for advancing learning in STEM. Apple’s initiatives in education have hit a headwind over the past five years as cheaper Chromebooks have gained more adoption in schools. We believe Apple and iPad are uniquely positioned toward creativity, while Chromebooks are better positioned for the utilitarian aspect of education (essays, spreadsheets, etc).

What was announced today?

  • 9.7″ iPad with support for Apple Pencil. Previously, the cheapest iPad with Pencil support was the 10.5″ iPad Pro for $649. We believe this will have a small impact on overall iPad demand. We are currently modeling for flat iPad unit growth for the next three years, and believe today’s news could inch iPad unit growth to 1-2% per year. The overall iPad revenue will likely remain unchanged given there will be a mix shift from the 10.5″ iPad Pro to the new, lower-priced 9.7″ iPad.
  • More free storage for education. Students get 200GB of iCloud storage instead of 5GB.
  • Everyone Can Create program. In 2014, Apple announced the educational Swift programming language. Today, Apple announced the Everyone Can Create program, which is a companion to Swift and focuses on creative elements ofmusic, video, photography, and drawing. Apple believes that nurturing creativity will help further education in the sciences.
  • SchoolWork. This app is essentially a dashboard for students, allowing them to see current to class topics, manage assignments, and message classmates.
  • Apple also talked about management tools for educators for teachers and administrators. These applications have already been available for several years.

Looking to the future with creativity, empathy, and community. One aspect of today’s event was Apple painting its picture of the future of education. Filling in the blanks, it seems that this future includes a combination heavy on science and creativity. We would agree and add that along with creativity, empathy and community are the human qualities that machines are unable to replicate. We’re encouraged to hear that Apple is, to some extent, preparing students for the future by focusing on our most unique abilities and using technology to foster them.

Are kids getting too much screen time? As we processed today’s news, which will ultimately lead to more screens in schools, we revisited our concern that kids are getting too much screen time. This is not an Apple-specific problem, given iPhone and iPad only account for roughly 20% of the world’s mobile screens. That said, given Apple’s dominance in tech, they are a natural target for the “too much screen time” narrative. It appears Apple shares parents’ screen addiction concerns and has dedicated a portion of its website to educating parents on managing screen time. See here.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple, Augmented Reality
3 min. read Show less