Left Brain Thinking: November 25, 2020

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're talking about 5G and how the technology is boosting the growth on some of its big players. And we're doing that with Mark Hines, managing director at Left Brain Investment Research. If you want to learn more about Mark and the firm, go to leftbrainir.com. They're on Twitter @leftbrainir. Mark Hines, thanks for joining me on Left Brain Thinking.

Hey, Chuck, thanks so much. I'm happy to be here.

5G. I have to say that when it comes to my own personal telecommunications, I'm probably more of a 3 or 4G guy. The G, of course, standing for generations. 5G, it's the fifth generation technology standard. It of course is what's next, but it's been what's next for a while. It's now not so much what's next as what's happening. That is changing what's happening with some of the companies and stocks involved, right?

That's exactly right, Chuck. 5G has been going on for a while, but it's got a very, very long way to go. 5G is sort of the next generation of mobile communication, cloud-based communication, and we've got this huge, call it digital transformation going on where everything's moving to the internet, whether that's generated by the sort of social distancing and the pandemic that's going on, or just the new apps, more people demanding online shopping. Everything's moving online. It's a big deal and there's huge, huge opportunities.

We've seen so much that's been going on because of the pandemic where it's been, let's get the technologies that are gonna make it office at home, whatever. 5G is in that, but has 5G and the 5G companies that we're about to discuss, have they actually benefited that much more from the pandemic? Have they seen a pickup? Or 5G versus the work-from-home stocks, they're really very different.

They have seen the benefit, and they are very much the same. You know, we've seen kind of an acceleration of what I think of as this digital revolution or digital transformation, and 5G is really enabling it. So if we talk a little bit about NVIDIA today, NVIDIA has been a huge beneficiary of the sort of stay-at-home and social distancing, but that's really just a small blip compared to what's coming over the next 5 years. It's just about every single industry out there is impacted and the opportunities are really big.

So NVIDIA ticker symbol NVDA, why is it standing to benefit this much from the continued development of 5G?

So NVIDIA makes GPUs, chips that go inside, originally they were for video games, which is still NVIDIA's kind of biggest segment, these graphical processing units. And what's happened in recent years is these chips, it turns out, are good for a lot of other things. One of the biggest ones has been data centers, right? As this explosion of data is happening over the last few years here, more and more companies are moving their business operations to the cloud, which means rather than having servers on-site on their own premise, they have off-site servers where people can access them from all their devices, whether they're inside the work building or outside working from home. And then Nvidia chips are in these data centers where all this data is being stored. So from Nvidia's standpoint, gaming is the big piece of the business. The fastest growing piece is data centers. These GPUs are being used in data centers, and that's really seen just explosive growth, stealing a lot of market share from traditional CPUs. But then it goes way beyond that, right? Nvidia chips are used in autonomous vehicles, self-driving cars. They're used in manufacturing, they're used in healthcare, smart homes, smart cities, just everywhere. So Nvidia is an example of a company that really just touches on the whole digital revolution, the whole 5G transition, and it's been growing very, very rapidly, but it has a long runway to go.

Rapidly. I mean, as we said at the top, left brain is looking for companies with the potential to double in 2 to 3 years. Nvidia has more than doubled this year. but for you to be looking at it now, that growth has to be continuing and presumably not just continuing but even accelerating, right?

Yeah, that's exactly right. And one of the ways we kind of gauge that is looking at total addressable market size. So for the trailing 12 months, NVIDIA's revenues were something like $18 billion, but they put out in their latest earnings call, they're estimating their total addressable market is around $250 billion. So they're growing very rapidly and they've got a lot of room to continue growing. I think this last earnings announcement, they put up something like 55% year-over-year growth, and then it was actually triple-digit growth in this data centers business that they have going. So, you know, they have been growing. You're absolutely right. I think I'm looking at 122% year-to-date return on NVIDIA. It's a volatile stock, but if you can kind of hang on through the volatility, this is one that has many, many more years of significant growth ahead.

That said, there is some talk that when we get through the pandemic, there will be a little bit of a comeback on some of those work-from-home technology stocks, etc., that maybe they're going to get ahead of themselves. Is the 5G the reason why you don't think NVIDIA is getting ahead of itself with this growth?

Well, NVIDIA is a volatile stock. One of the things we like to say sort of generically is we'd rather have a lumpy 20% annual return instead of a smooth 6%. NVIDIA is that on steroids, right? There have been periods in the not too recent past where it's had significant drawdowns, but it's come raging back. It trades at around 22 times sales, the price-to-sales ratio, which is to a lot of people expensive. But when you look sort of at the sales growth rate, it's trading only at 17 times one-year forward sales. And if you project that out, really within a few years, the price-to-sales is under 10, which becomes very, very reasonable. To sort of more directly answer your question, yes, it's a volatile stock. But that's the price you pay for the long-term growth. And Nvidia has a lot of long-term growth.

You know, you said it could be seen as expensive that way. Well, if you look at the PE ratio where it's in the 80s, that would be where people would say it's a really expensive stock. That's not something that you actually really care about.

We don't. I mean, you don't want to see a growth company with huge earnings because what that means is they're not reinvesting in their business, right? A lot of times you look at value stocks that are more mature businesses and they don't have a lot of growth. They start paying big dividends and they, they start buying back shares because they don't have anything to do with the cash. NVIDIA is the complete opposite, right? There are growth opportunities everywhere for NVIDIA. So they are spending on growing their business, and that's really what you want to see them doing. So like you said, price-to-earnings ratio is for the most part irrelevant to us. You know, you look at companies like Amazon. Amazon basically had no net income for 15, almost 20 years because they kept reinvesting in the business. And that's a good thing. That's, that's actually what you want to see with the growth business.

NVIDIA does have a small dividend. I mean, the yield is tiny, tiny, but it's there. Does that kind of show you a little bit of that balance? Like, hey, you want them to invest almost everything going into it, but you don't mind having that growth stock with just a little bit of dividend showing we want to attract those longer-term folks who see dividends as being important?

Yeah, I mean, that's one way to look at it. I kind of look at it as a token dividend. You know, they started paying that dividend years ago, when the growth rate was a little bit lower than it is right now. And rather than just getting rid of the dividend, they've kind of hung on to it and people like it. And exactly like you said, it's kind of an indication to some people that it is steady business, that it does produce a lot of cash flow. But the dividend for most people and for us at Left Brain Investment Research, that's not why we're investing in Nvidia. We're investing in it for the growth.

And the big growth ahead is why we're looking at Nvidia, NVDA, right now. And If you want to learn more about it, check out the work at leftbrainir.com. Mark Hines, thanks so much for joining me to talk about it.

Thank you so much, Chuck. My pleasure.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm Chuck Jaffe, your host. Learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Mark Hines, Managing Director at Left Brain Investment Research. Learn more about him, the firm, and its services at leftbrainir.com, on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Find it and subscribe on your favorite podcast app and plan to put your left brain thinking cap on every week. Until next week, have a great holiday, everybody. Stay safe.