Weekend Update #197
Thank you for your continued support and engagement. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
The Dow Jones and S&P 500 reached all-time highs this week after the Federal Reserve initiated its easing cycle on Wednesday, cutting its benchmark interest rate by 50 basis points to 4.75-5% in an aggressive start to a policy shift aimed at bolstering the US labor market. Fed projections suggest further cuts of at least 50 basis points over the two remaining 2024 meetings, with a total reduction of 100 basis points expected through 2025. However, the move raised concerns about potential underlying risks to the economy, as both FedEx Corp and Lennar Corp missed earnings expectations.
Additional economic data released this week showed jobless claims fell to their lowest level since May, indicating a still-strong labor market despite slowing hiring. Meanwhile, home sales continued to struggle in August, declining 2.5% from July and 4.2% year-over-year.
Corporate Highlights:
Nike Inc. said that longtime executive Elliott Hill is coming out of retirement to replace John Donahoe as chief executive officer.
FedEx Corp. plunged 15% on Friday as the economic bellwether missed profit estimates and cautioned that its business would slow.
Pfizer Inc. released positive trial data for its treatment ponsegromab, which could become the first drug approved to specifically treat cancer cachexia.
DirecTV reached a deal with Disney on Saturday to end a blackout of the media giant’s channels, including ESPN
Google won a court fight with the EU over a €1.5 billion fine for anti-competitive actions regarding online ads, partly making up for last week’s crushing defeat in a separate judgment for abusing its monopoly powers.
23andMe Holding Co. co-founder and Chief Executive Officer Anne Wojcicki told employees that she remains committed to taking the genetic testing company private following the resignation of its independent board members.
Tupperware Brands Corp., whose plastic containers became synonymous with food storage, filed for bankruptcy following a years-long struggle with sales declines and growing competition.
Friday’s Close (Weekly Performance)
S&P 500 5,702.55 (+1.36%)
Nasdaq 17,948.32 (+1.49%)
Dow Jones 42,063.36 (+1.62%)
Thank you Blue Room Analyst NICK PEART
This was the week for the much anticipated rate decision by the Fed. It did not disappoint with Federal Reserve Chairman Jerome Powell slashing rates by half a percentage point. Despite the bigger than originally signaled cut, he attempted to reassure the market by stating, “I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated.” As is often the case, investors were cautious as the market initially dipped but ultimately oscillated to finish the week in positive territory. Fund One moved in a similar pattern following the rate announcement.
Our long position in Mobileye, an autonomous driving technology firm, was a big contributor to performance this week. Mobileye's stock jumped after Intel, its majority shareholder, provided some reassuring news amid ongoing pressures on both companies this year. Intel confirmed it has no plans to sell its stake in Mobileye, easing concerns among shareholders.. There had been speculation that Intel might consider selling its Mobileye stake, but the company recently unveiled plans to restructure its foundry business and reassured investors about its commitment to Mobileye.
In addition to our short position in Intel moving against us in late day trading on Friday, due to speculation of a potential takeover by Qualcomm (stay tuned!), another detractor to performance came from one of our biotech holdings, 4D Molecular Therapeutics. 4D shares fell following updated data on its experimental treatment for an eye disease. The decline in share price is attributed to the company's decision to shift Phase 3 enrollment from a broader patient population to a more concentrated cohort of patients, a decision that may lengthen the enrollment process. We believe that management made the right strategic decision and we remain holders in anticipation of upcoming catalysts.
Thank you Blue Room Investing President JOHN FENLEY
—NVDA—
One dollar invested in NVIDIA
at its IPO on January 22, 1999,
would be worth $12,566 today
for capital appreciation
exceeding 1,256,600 percent.
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NVIDIA
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by MiNYOUNG SOHN
BLUE ROOM FOUNDER & CIO
NVIDIA was founded by Jen-Hsun Huang, an immigrant and Taiwanese—American, whose entrepreneurial success story travels through a humble path involving a unique choice of boarding school in Kentucky, to being the best dishwasher that Denny’s ever had, and completing electrical engineering at Oregon State and Stanford University. He was a brilliant engineer whose reputation outside of LSI Logic allowed him to raise money and backing from Sequoia Capital, a legendary venture capital firm whose storied investments include Apple Computer and Cisco Systems.
Jen-Hsun Huang
From its inception, NVIDIA codified principles into its business structure which drive the company to this day, including superior processing power at a competitive price, a unified design architecture across products, and value enhancing software ecosystem. Despite the enormous success experienced by the company today, in its infancy, NVIDIA nearly went out of business several times, as the company made “big bets” on technology which sometimes did not pan out as expected. The company won a contract from SEGA to develop advanced graphics chips, but Jen-Hsun realized they had made the wrong bet on technology, which would kill the company. The CEO of SEGA, Shoichiro Irimajari, himself a brilliant engineer and business executive, had formed a relationship with Jen-Hsun and believed in his capabilities so much that he convinced SEGA to invest in the start-up company, infusing $5 million to NVIDIA to keep the company alive long enough to deliver the GPUs to power its revolutionary Dreamcast video game console. 1 Soon after this experience, NVIDIA released the RIVA TNT graphics processor, which won critical acclaim for its immersive 3D graphics experience, and solidified NVIDIA’s position in the market. NVIDIA introduced the GeForce brand in 1999 with GeForce 256, and the new product architecture was met with significant industry acclaim, and cemented the company’s position as the leading provider for advanced 3D graphics. I discovered NVIDIA after the company went public in 1999. I was a research analyst for Janus Funds, covering a wide swatch of stocks. I had already introduced the firm to the interactive software industry, and we were the largest shareholder of Electronic Arts, and I felt that advanced graphics was the type of opportunity the growth centric Janus portfolio managers would gravitate to, and they did.
We soon became the largest shareholder in NVIDIA, which meant that I got unparalleled access to the company’s employees as well as inside access during many of the industry events, such as the GPU Technology Conference (now called GTC) and Siggraph. Of course, I had the unparalleled opportunity to meet with CEO Jen-Hsun on at least 20 occasions as he was creating the powerhouse company we see today. What I learned from Jen-Hsun Huang was the power of single minded focus on excellence in your area of operation. He wanted NVIDIA to make the best possible GPU in the market. The GPU was itself a new term he would have to explain for many years to come. Unlike the CPU, or central processing unit, made famous by Intel and its Pentium brand, the GPU, or graphics processing unit, invented by NVIDIA, was a high parallel architecture capable of processing mathematical calculations at blazing speed. Jen-Hsun explained that computer graphics was a perfect application for his GPUs, because there would always be more demand for ever realistic 3D graphics. At the time, companies such as Creative, which focused on audio processing had a profitable business on their Sound Blaster brand, but Jen-Hsun foresaw an industry with declining headroom. He pointed out that whereas the human ear has diminishing capability to appreciate high fidelity, there was really no such limit to what the human eye would discern with respect to 3D and photorealism. NVIDIA grew by introducing new award-winning GPUs each year, winning a loyal fanbase of dedicated hardcore PC gamers, who effectively funded the company’s investments in research and development for products by purchasing the most advanced GPUs offered each year.
Going Upstream
NVIDIA introduced its Quadro workstation class GPU for professional computer-aided design in 2000. As a business, Quadro allowed the company to benefit from market segmentation of its highest performing GPUs by allocating them to the professional visualization market, displacing expensive proprietary hardware from Silicon Graphics.
Quadro was essentially the same architecture as the consumer oriented GeForce chips, but with some minor adjustments to firmware and software, could be sold for multiples of the high end GeForce products. Quadro boosted NVIDIA’s revenues and gross profit margin, and positioned the company to develop value-added software solutions for industry specific applications for years to come.
Going Upstream
NVIDIA introduced its Quadro workstation class GPU for professional computer-aided design in 2000. As a business, Quadro allowed the company to benefit from market segmentation of its highest performing GPUs by allocating them to the professional visualization market, displacing expensive proprietary hardware from Silicon Graphics. Quadro was essentially the same architecture as the consumer oriented GeForce chips, but with some minor adjustments to firmware and software, could be sold for multiples of the high end GeForce products. Quadro boosted NVIDIA’s revenues and gross profit margin, and positioned the company to develop value-added software solutions for industry specific applications for years to come.
Networking, Branching Out and Mellanox
At the time, NVIDIA believed that it did two things very well. First, NVIDIA was designing the best GPUs in the market. Second, the company felt that it was very good at designing maximum throughput for input and output functions.
Around 2000, NVIDIA began to showcase their capability and launched the nForce chipset, which combined increased input and output bandwidth as well as integration of media and communications processes into the “southbridge” of the PC motherboard. For the consumer, nForce offered superior overall system performance as well as seamless integration into the GPU to provide the best possible gaming experience.
NVIDIA found early success with the AMD ecosystem, as AMD was open to platform innovation which would improve their overall competitive positioning and market share vs. Intel. But Intel was not receptive to competing chipset from NVIDIA, and NVIDIA was not able to penetrate Intel based motherboard market. Eventually, NVIDIA shut down nForce and the MCP (media and communications processor) business line, because they were not able to go to market and compete effectively with these innovative products.
In 2019, NVIDIA acquired Mellanox Technologies, an Israeli-based networking company. Mellanox was integrated into NVIDIA’s networking division which enables the massive parallelism executed across thousands of GPUs to work as a single computing cluster
ARM and the CPU
NVIDIA has always acknowledged Intel and CPU as one of the most meaningful inventions in human history, while pointing out that computers were initially built to process Word and Excel, digital applications which focus on rendering and calculations of words and symbols. Whereas the CPU is a critical component of the computer, NVIDIA was built around a world that was increasing in complexity and richness and that the PC would be used to solve problems far beyond the processing ability of the general purpose CPUs produced by Intel.
GPUs, however, do require the service of a CPU. Although GPUs exploded in usage and functionality with their programmability through NVIDIA’s CUDA software language, many basic tasks are still best served by CPUs, but the smaller, cheaper and more power efficient, the better.
On September 13, 2020, NVIDIA and Softbank announced a deal where NVIDIA would acquire ARM, the most pervasive computing platform in the world, for $40 billion. This deal was significant in its foreshadowing of the massive H100 GPUs systems produced by NVIDIA today which incorporate ARM-based CPUs alongside the latest GPUs. Probably in a correct move by regulators, the acquisition was denied on anti-competition grounds.
Looking Ahead
NVIDIA expects to generate over $60 billion in revenue this year, a 120% increase from 2023. NVIDIA could double again in 2024, based on current growth rates. Where it goes from here is probably dependent on how the business evolves from here.
There is no analog today which combines leadership in Hardware, Software and Services. International Business Machines at its heyday (last century) may be the best company to compare the enormous growth potential ahead of NVIDIA, should it decide to offer more A.I. related computational services in addition to the just the GPUs themselves.
Source: Comparing IBM CEO Yearly Market Values
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