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Virtual Reality could make this stock the next Amazon.com Add to ...

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Citi’s global quantitative strategy team has enjoyed resounding success in ranking the world’s most promising and profitable investment themes. The list is currently topped by Video Game Growth – a sector that has generated eyepoppingly strong performance, as I noted previously in the GlobeInvestor newsletter – and their Top 10 also includes virtual reality stocks.

As the dominant provider of graphics processing units – technology to process and display graphics – Nvidia is not only poised to benefit from video game growth and virtual reality, but also from the development of artificial intelligence. Nvidia products increase the speed of processes like landmark identification for autonomous vehicles, speech recognition and the type of image interpretation that is already assisting doctors read the output from magnetic resonance imaging (MRI).

For Citi technology analyst Kota Ezowa, it is explosive growth in virtual reality applications that will drive Nvidia’s stock price higher. Mr. Ezowa believes that a combination of gaming and commercial demand will increase total spending on virtual reality from a current level near $25-billion (U.S.) to $80-billion by 2020 and an astounding $569-billion by 2025. The likelihood that Amazon.com will develop a virtual shopping mall tailored to individual tastes, as one example, seems high.

Many competing analysts have grown cautious on Nvidia recently after its strong performance, but Citi maintains its buy rating and 12-month target price of $145 on the stock (it now trades around $136).

Nintendo and Sony are more straightforward plays on video gaming. Citi recently initiated analyst coverage on Nintendo and forecast profit growth of 37 per cent for the next year. Analyst Minami Munakata expects strong sales for the company’s new mobile gaming platform Switch and sees potential stock price upside of 77 per cent if bullish projections become reality. The analyst also notes that Nintendo is set to open a theme park, emulating Walt Disney Co.

Sony’s business diversification makes it harder for gaming revenue to move the needle on total profits, but Mr. Ezowa recently raised his target price by 12 per cent and now expects roughly a 9-per-cent appreciation in the coming year.

Investment-wise, Nintendo looks interesting, but the accompanying line chart underscores that Nvidia, with its 10-fold return over the past four years, is clearly the star of the show where this theme is concerned. Nvidia’s valuation levels reflect this success with an expensive trailing price to earnings ratio of 44.9 times. It remains the case, however, that the company is front and centre for a number of exciting secular growth stories and, for investors careful about entry points, considerable investment upside seems available over the longer term even if Mr. Ezowa’s growth projections for virtual reality are not fully realized.

Theme/stocks to watchSymbol3M Return %YTD Return %3Y Ave Ann Return %P/E Ratio TTMP/E Ratio Fwd
Video gaming
Nvidia CorpNVDA-Q27.928.597.344.939.4
Sony Corp. (ADR)SNE-N13.426.830.0N/A17.3
Nintendo Co Ltd (ADR)NTDOY-OTC32.731.336.6N/A31.4
Medical technology
M3 Inc*2413-Tokyo7.34.831.662.256.5
CRISPR Therapeutics AGCRSP-Q-13.1-22.5N/AN/AN/A
Takara Bio Inc*4974-Tokyo0.1-1.315.5137.5N/A
Auto electronics
Delphi Automotive PLCDLPH-N13.928.110.313.212.7
Visteon CorpVC-N9.925.223.618.017.0
Renesas Electronics Corp*6723-Tokyo-8.81.712.920.621.3
Cyber security
Palo Alto Networks IncPANW-N-25.4-7.722.5N/A42.2
SofTech IncSOFT-OTCN/A11.8-26.05.4N/A
Proofpoint IncPFPT-Q-0.115.738.9N/A129.6
Virtual reality
GoerTek Inc -A*002241-Shenzhen21.634.79.730.823.0
Fintech
Global Payments IncGPN-N14.829.037.646.122.1
Ingenico Group*ING-Paris11.818.113.022.019.2
Alibaba Group Holding (ADR)BABA-N24.142.1N/A54.229.1
* denotes non-North American market. Source: Citigroup

Source: Scott Barlow/Citi

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