Chipping Away

“NVIDIA is not solely about gaming, there are multiple and growing applications for their chips, we are superficially talking about autonomous driving as a great growth area. Obviously if you are installing a computer system on driverless (or autonomous) motor vehicles, then you must have the most powerful chips. NVIDIA have partnered with Audi, as well as Mercedes Benz on artificial intelligence chips in vehicles, Bosch, the worlds largest automotive supplier are also in deep in with NVIDIA.”


 

To market to market to buy a fat pig Stocks in New York, New York, rallied to another set of all time highs. Highs for the Dow Jones Industrial Average, up nearly half a percent on the session, highs for the broader market S&P 500, which closed 0.36 percent higher and the nerds of NASDAQ also hit another fresh all time high, up one-third of a percent on the day. Broad based gains across the board, from basic materials (those are resources to you and I) to healthcare, all the major sectors closed in the green. There were a few losers on the day, the Coca-Cola company struggles to get traction after a soggy outlook for the year ahead, down over one and a half percent on the session.

Activision Blizzard popped nearly 19 percent on the session, the market cap is nearly 42 billion Dollars. More than Deutsche Bank. Activision Blizzard has a market cap in excess of that of Richemont. And there you thought that entertainment was confined to old school areas. See below with a write up on NVIDIA that it is time for all of us to update our reality. You and I might think that gaming is a “waste of time”, other people view mundane TV watching as a waste of time. Each to their own.

I did see that Tim Cook thinks that augmented reality might be as big as the iPhoneApple CEO Tim Cook says he regards AR ‘as a big idea like the smartphone’ What do you think? Intrusive at all? If you are for instance, standing in front of a painting at a gallery, would it be *nice* to know everything about the painter, an interactive view? Perhaps, the uses could be endless, you may be at a football match (where the crowd stays off the field) and get stats about the players, on your phone, whilst not missing a thing i.e. overlay the stats on the fields, on your phone, capiche?


 

On the local front stocks surged just over a percent and a half. Financials added nearly two percent to be the major push of the day, Kumba, Anglo and Glencore were the best of the majors, Sanlam and Woolies were also at the top of the leaderboards, Hammerson and AngloGold were the losers …. if there is such a thing. There were no 52 week lows, which tells you something at least, whilst Adcock, Datatec and Pinnacle all clocked new 52 week highs. Good Chinese data from earlier in the day had a huge impact.

This morning there is news of a proposed groundwork for a merger of Afrisam and PPC, a conference call around 08:30 will reveal a little more. I wonder what the competitions authorities are likely to think of this merger? Anyhows, for the time being the company (PPC) says at the moment, the two companies have: “entered into a Heads of Terms to assess the merits of a potential merger between the two groups (“Proposed Merger”) and to enter into formal discussions in this regard.” I am pretty sure that there are a lot of people, far smarter than I am, who are working on all angles.


 

Company corner

NVIDIA is a company that has managed to explode onto the scene with the advent of the PC era. When I say “gaming” to you, you think of a nerd eating pizza, drinking energy drinks and staying up all night engaging with friends and foes alike online. WRONG. Computer gaming is a 100 billion Dollar industry, NVIDIA’s GeForce is the largest gaming chip on the planet, with over 200 million users. It is another form of entertainment, gaming. TenCent own the single largest game on the planet, Riot Games League of Legends is around 22-23 percent of the online gaming industry. It is an alternative and fast growing form of entertainment that appeals to many young people.

NVIDIA is not solely about gaming, there are multiple and growing applications for their chips, we are superficially talking about autonomous driving as a great growth area. Obviously if you are installing a computer system on driverless (or autonomous) motor vehicles, then you must have the most powerful chips. NVIDIA have partnered with Audi, as well as Mercedes Benz on artificial intelligence chips in vehicles, Bosch, the worlds largest automotive supplier are also in deep in with NVIDIA.

This is all in an attempt to make sure that the roads are safer places. If the vehicles can react at lightning speed and the AI can get better as a result of processing speeds, we will all be safer. The company is also working with HERE and ZENRIN on making solutions, the whole idea is that all the vehicles learn from the network. i.e. if I drive past a point in the road that has been changed (a rockfall), it will immediately tell the car around the corner and so on. The transportation industry is a ten trillion Dollar business remember. And then AI manufacturing, the kind that Musk is yearning for. We spoke about FANUC the other day, the biggest in the manufacturing of industrial machines, they are a client of NVIDIA.

Another area of growth for NVIDIA is in data centres, clients include all of the web services businesses, Alibaba, Amazon, Google Cloud, Microsoft Azure and IBM Cloud, all the majors. And something called “gaming everywhere”, where you can rent a chip via a great internet connection. As the chips evolve so quickly, you may want this option. And then, virtual reality (VR), at the moment the graphics are “not good” in VR, NVIDIA are trying to change that. They are working hard on trying to cure cancer, having teamed up with several cancer research partners, using artificial intelligence.

Forget all of that, ok, what about the stock? We can tell that the future is bright and there are plenty of opportunities. Revenues for the last year clocked 6.91 billion Dollars, up 38 percent from the prior financial period. Gross margins expanded by 270 basis points to 58.8 percent. Net income grew 171 percent to 1.666 billion Dollars, whilst diluted earnings per share clocked 2.57 Dollars, up 138 percent from the prior year. Astonishing. The expectations for Q1 are revenues of 1.9 billion Dollars, and margins are expected to expand to as much as 59.7 percent.

The stock has moved sharply higher, and rightfully so. At 120 USD a share now, the stock trades on 47 times earnings. The thing is, if the expectations are for the company to earn around 3.50-3.70 Dollars next year, at the midpoint the stock trades forward on 32 times. Growing at that rate of knots, I suspect that the stock certainly has more legs. It looks expensive, it isn’t really. Whilst you can’t own everything, all of the time, this is certainly an interesting opportunity at many different levels. In the fast moving world of chips, you definitely have to pay attention. I suspect that there is plenty of room for multiple entrants in the internet of things, at the moment NVIDIA seem to be head and shoulders above their peers. We are a buy rated on this stock.


 

The Columbia Sportswear company is of course best known for their quality clothing line of active and outdoor wear. They have an online presence here in South Africa, you can buy anything from fishing gear to Manchester United gear(off field kit sponsor). You can get some pretty cool running togs to hiking boots, built to last. I can’t say that I am exactly the target market for all of their products, maybe if I had access to all of their Montrail running gear or their shoes from Sorel. Their other brands include “lifestyle” and yoga wear prAna (anyone out there?), and Mountain Hard Wear which targets rock climbing, hiking, skiing and camping folks. I guess our familiarity with these products would be somewhat reduced as a function of not experiencing the biting cold and the outdoor lifestyle of snow related activities. I guess it is fair to say that.

The company ironically was setup as a hat company (the Rosenfeld Hat Company), by chair Gertrude (Gert) Boyle’s parents, who had fled Nazi Germany. Gert is 91. Her husband, Neal Boyle diversified out of hats and into outdoor wear, mostly for active lifestyles that included skiing, fishing and hunting. Her son, Timothy, runs the business. The business has only been public since 1998, some of the aforementioned brands were acquired after the company listed. In fact, all of the brands that they own were acquired after listing. In short, the company is still steered by the family and caters for those who enjoy the outdoor lifestyle. You can argue that at the same time as being a fairly crowded space, the company operates a niche and to a direct customer, who is probably quite loyal to the brands. Quality is therefore a huge consideration, which means the customer will be paying a premium for the product.

The company operates through direct and wholesale channels, in retail front end, as well as (like everyone) a large and growing online presence. That online presence might well be great for brand exposure across the globe, the company is still with over 60 percent of their sales in the US, still very much an American business. Together with Canada, next door, the company can say that more than 70 percent of their sales come from North America. I suppose it figures as much, rich people buying quality equipment for outdoor usage.

The company is relatively small, total sales for last year was 2.38 billion Dollars, a two percent increase over the prior financial year. Net income rose 10 percent, the company earned 2.72 Dollars per diluted share. The market quite “enjoyed” these numbers, the stock jumped over four percent after hours to be at 55.62 Dollars a share, the stock trades historically on just over 20 times earnings. The yield is not exactly tearaway, the dividend yield is 1.3 percent before tax.

The outlook was hardly earth shattering either, the company outlook suggests four percent earnings and sales growth across all territories. It is a pretty tough market in this space, niche brands can continue to hold their own against one another, what matters is a growing trend of health and wellness. People are more likely to buy higher quality items. Their entry into the holy grail of consumers, China, has been through a JV with Swire (they have a 60 percent interest), a Hong Kong business with British roots. Doesn’t quite sound Chinese, does it? At the fringes one can own this business which can complement Nike, LuluLemon and Under Armour in a portfolio. Great theme, good company and a compelling investment.


 

Linkfest, lap it up

100 years ago sometimes seems much further away than it actually is. There are currently around half a million people who are older than 100, so we can say that the early 1900’s is recent history? To put this period into perspective an institute in Russia is putting up social media posts from all the key players from back then. They have even gone as far as to put up the weather conditions for each day – A Russian social-media site is reliving 1917.

This is for Byron, I am pretty sure he knows all about this already – This tiny camera sneaks up on wild animals for the perfect shot. The whole contraption goes for 2000 Dollars. I suspect that SAN Parks will have pretty strict guidelines on usage, my sense is that it may be viewed as intrusive. Check out all of the Camtraptions, including the BeetleCam.

Have you ever wondered about restoration of fine old art pieces, the Vatican has a great program going. The museums account for 300 million Euros in revenue and 40 million Euros of profits, pretty big business. 28 thousand people on average pass through the famous Sistine Chapel every day, that amounts to a fair bit of wear and tear. Meet Barbara Jatta, who is responsible for all the upkeep – An Innovator at the Vatican.


 

Home again, home again, jiggety-jog. Markets across Asia continue to trend higher, the Nikkei is barreling towards that 20 thousand mark again. Shanghai and Hong Kong are also higher, we should see some follow through here. The ZAR looks marginally better, which could hold things back a little. Last couple of weeks of earnings for the US, most of the majors have reported, looks good so far. Now, onto the local front, we are going to be seeing real numbers post the trading updates.


Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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