Smartphones, online shopping, social media and Internet advertising have become central factors in modern life but the novelty – the sheer wonder that many felt at the release of the first iPhone – has worn off. So, while it's unfair to call the FANG stocks – Facebook Inc., Amazon.com Inc., Netflix Inc. and Google Inc. (now Alphabet Inc.) – as companies of the past, they're merely the present.
The future might belong to Nvidia Corp., "the smartest company in the world," according to a recent ranking by the MIT Technology Review.
Nvidia is best known as a maker of graphic processing units (GPUs) for use in video games. More than half the company's revenue still comes from that business (see accompanying bar chart) but the recent huge gains in the stock price have accompanied the application of GPUs in the fastest-growing, hottest areas of technology. These new business areas include autonomous vehicles, cloud-based data analysis, robotics, artificial intelligence/machine learning and health-care technologies. Nvidia also has a dominant market position in "virtualization" – programs allowing users to access operating systems and hardware situated elsewhere.
The efficiency of GPUs in processing visual data has clear advantages for autonomous vehicles – GPUs interpret data from car-carried cameras and radar quickly – and also face-recognition systems for airport security. The advantages of artificial intelligence in health care are remarkable. Stanford University researchers, for instance, have developed an AI process that detects skin cancer as accurately as human doctors.
Citi analyst Atif Malik is arguably the biggest bull on Nvidia stock with a price target of $180 (U.S.). Mr. Malik expects Nvidia will generate explosive revenue growth in its data centre business. He forecasts that Nvidia's market opportunity in data centres to rise from the current level of $2.1-billion to $30-billion by 2020. Nvidia systems are used in Facebook, Microsoft, Amazon.com, Alibaba and Baidu data centres to "train" AI programs in language processing, video and image analysis.
The Amazon Echo voice-activated speaker device and the use of chatbots – online programs barely distinguishable from humans that answer client questions – in financial services are only two indications of the growing use of AI.
Total spending on AI is expected to grow at a near-incomprehensible pace in the coming years. Global spending on cognitive and AI services "will continue to see significant corporate investment," achieving a compound annual growth rate of 54.4 per cent through 2020, when revenues will be more than $46-billion, according to a recent forecast by International Data Corp.
Nvidia's stock price has tripled in the past 12 months so it's no surprise valuation levels are expensive, and even prohibitive for risk-averse investors. The trailing price-to-earnings level is 52.5 and the forward-looking P/E ratio is 45.4. Even investors with high risk tolerances should keep any Nvidia portfolio position to a limited percentage of assets. Earnings, however, have grown at a stunning 74.6-per-cent annual pace over the past three years and this makes the investment tempting.
Nvidia is positioned for the future of technology, or more accurately the expected future. Buying a high-flying, expensive stock that has just tripled in price is always a dangerous proposition, but all investors can follow Nvidia as a benchmark for the rapidly approaching new age of technological advancement.
Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market online.