I want to return to a conversation we had almost a year ago to the day.
See, back on May 24, 2019, I warned you to stay clear of Wall Street’s hype machine regarding a major tech merger.
Don’t get me wrong. I thought the buyout made a lot of sense for HPE since Cray is a computing legend with a long history of historic breakthroughs.
But I didn’t see a lot of upside ahead for the stock even though Cray had just nailed a $500 million U.S. government contract.
So, I’m happy to report that the “hidden” play on the merger that I suggested instead has become one of the top performers in the Covid-19 panic.
Now that the company has completed its own $6.9 billion merger, the stock is set to double from here…
An Amazing Recovery
If at first you doubted my advice on HPE, I can understand why. After all, from the time I made that call until the stock hit a high on November 12, 2019, HPE was up more than 20%.
Unfortunately for HPE investors, that was the high-water mark. The stock began selling off then and fell by more than 52% through its recent low on March 17.
By contrast, shares of NVIDIA Corp. (NVDA) were up by 4.4% over the same period. Even better, it is shrugging off the bear market decline. Just yesterday, NVDA hit a new high.
Nvidia just finished its merger with Mellanox Technologies Ltd. At $6.9 billion, it’s Nvidia’s largest deal by far and marks its move into becoming a leader in the high-performance computing (HPC) space.
Nvidia has long been a key supplier of chips to the rapidly growing machine learning and AI industries.
For example, the Nvidia Drive AGX platform enables self-driving cars by using deep learning to fuse sensor data and allow the car to quickly make intelligent decisions.
Every Tesla made since mid-October, 2016, is equipped with one of these chips. BMW, Mercedes-Benz, and Volvo are also working with Nvidia on car AI systems.
But there’s more to AI than just chips.
High-Growth Partnerships
The vast supercomputers that allow banks to scan their transactions for fraud in real time, pharmaceutical companies to look for new drugs, and the military to protect their networks and decode foreign encryption need chips that can talk to each other at lightning speeds.
That’s where Mellanox comes in. This Israeli company makes the high-speed interconnects that link chips in supercomputers. This ensures the chips inside can work at their fastest.
Mellanox’s client list is extremely impressive. Netflix Inc. (NFLX), the ten largest car makers, and five of the top six global banks use the firm’s interconnects.
Together with Nvidia, they also power more than half of the world’s 500 fastest supercomputers.
This merger means Nvidia can now offer a full, integrated package of both AI chips and the equipment to interconnect them to data center and cloud providers globally.
It’s especially important as Nvidia is about to unveil the next generation of its data center chip, called “Ampere,” later this year.
You may be more familiar with Nvidia’s chips from the heyday of cryptocurrency mining when the company’s graphics cards turned out to be extremely good at the calculations needed to create new Bitcoins.
And of course, the company’s roots are in video game graphics, where it continues to be the market leader and is expanding into Virtual Reality.
However, as cloud computing, HPC, and AI have been taking off, companies like Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL) quickly discovered that these graphics cards were good not only for video games, but also for powering vast HPC data centers.
Nvidia’s chips are now used in data centers that power Google’s search and ad systems, Amazon’s e-commerce platform, and many other cloud and tech giants.
As the demand for more cloud processing power has grown, Nvidia has started designing chips specifically for the requirements of data centers and HPC.
It’s a space Nvidia intends to dominate. And the merger with Mellanox is a no-brainer to accomplish exactly that.
The AI Economy
Here’s the thing. Accenture says that by 2035 AI can double economic growth in the 12 most advanced economies that now have a total value of $61 trillion.
Combined with Mellanox, Nvidia will be powering that rise. So you can see why I believe there’s so much upside still ahead for Nvidia.
The numbers bear it out. Nvidia has been growing its per-share earnings by 18% over the past three years. At that rate they will double in four years.
Meaning that before the decade is out, we’ll have seen two doubles. That’s total gains of 300%.
We’ll have a better handle on Nvidia’s financials when the company reports earnings on May 21.
It’s possible that disruption caused by the Covid pandemic could have the company miss forecasts. In that case, I believe any setback would be temporary.
With millions of people suddenly working from home, the move to the cloud has been supercharged.
And Nvidia’s hardware is exactly what cloud companies need to fulfill that demand.
So at the very least, put Nvidia on your wealth-building watchlist Coronavirus or not, this stock is going places.
Cheers and good investing,
Michael A. Robinson
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Source: Strategic Tech Investor