By Kwan-Chen Ma and Chris Landers
All investors are constantly asking themselves where their stocks are going, especially after the stocks just experienced significant volatility. Our mind will naturally search for similar patterns in history. As NVIDIA's (NASDAQ: NVDA) stock has made more than 200% in last one year, many would asked how today's NVIDIA is compared to yesterday's Apple (NASDAQ: AAPL) or RIM (BBRY) (BlackBerry) when they also made their similar market advances.
Why NVIDIA, Apple, or RIM?
Apple and RIM are selected for comparison since, sometime in the past, they were at a similar spot on their product life cycle as NVIDIA is today. For that reason, we are setting the stage for a historical time point - baseline - when it is in all aspects for NVIDIA, Apple and RIM. To be fairly compared with today's NVIDIA, Apple's and RIM's baselines were selected to ensure that (1) each stock had just made a significant recent advance, say similar to NVDA's +200%, for the recent one year, and (2) such increases in stock returns had been supported by major fundamentals. Therefore, as the baseline (T = 0) for NVIDIA is the current time, February 2017, we chose July 2012 for Apple, and May 2008 for RIM. From Figure 1 above, at the individual time point, each of the three stocks has just experienced more than 200% return up to its respective baseline. In addition, at that time, all three companies just had major product launches.
Before going further, mind you that it is not our intent to compare the relative valuation between NVDA, AAPL, and BBRY. A more interesting question, though, is that if we can learn from AAPL's & RIM's historical experiences, under the similar circumstances, which may shed some light on the direction where NVIDIA will go from here.
1. Different Spot on Product Life Cycle
BlackBerry's "Curve" in 2007: Before the term smartphone was invented, RIM's BlackBerry (a.k.a., "Crack Berry" now) has been considered a status symbol for the elite, i.e., Wall Street professionals. RIM's first consumer phone came out at the same time as the iPhone in 2007 and was called the "Curve," following "Pearl" in 2006, and original BlackBerry 957 in 2000. The BlackBerry 957 was considered a landmark device for RIM, though it may not have seemed that way at the time. At its release, it was little more than an overgrown 950, but unlike its little brother, the 957's basic form factor would ultimately stand the test of time - and if you let your eyes go out of focus just a bit, you can actually see the beginnings of the ubiquitous user interface found on every BlackBerry sold today. Around August 2008, BlackBerry's global handset market share had peaked around 20% and declined to less than 5% before 2010. It is reasonable to put 2008's RIM near the end of the growth stage in its product life cycle (Figure below).
Apple's iPhone 1 in 2007: I feel I don't need to introduce iPhone 1. On January 9, 2007, Steve Jobs said, "today, Apple is going to reinvent the phone." Jobs introduced the iPhone as a combination of three devices: a "widescreen iPod with touch controls"; a "revolutionary mobile phone"; and a "breakthrough Internet communicator." By July 2011, more than 72 million iPhones were sold just in 2011 alone and Apple obtained 23% of the global handheld market share. It is also safe to assume that Apple's 2011's iPhone was right in the middle of the growth stage in "smartphone" life cycle.
NVIDIA's GeForce 900 Series in 2014: The company has recently solidified itself as the technological leader in GPU technology. In late 2014, NVIDIA released its 900 series GPUs. It had three different offerings in order to capture as much of the market as possible. The GeForce 960 was the economy model; the GeForce 970, the company's mid-range offering; and the high performance GeForce 980. In fact, it took AMD (NASDAQ:AMD) almost one year to release a GPU that was comparable in terms of both price and performance. By the end of 2016, NVIDIA had taken 30% of the discrete GPU market share from AMD within an 18-month period. However, today's NVIDIA is still considered in the early growth stage on the product life cycle of the next-generation growth areas such as artificial intelligence, virtual reality, and self-driving technology (see Figure above).
2. Business Risk: B2B vs. B2C
Obviously, the three companies have different business models. NVIDIA has a mainly business to business (B2B) model, while Apple and RIM are business to consumer (B2C) model. The risk profile of these two approaches can be significantly different in that B2B products are generally more complex. NVIDIA's products are used in high-end CPU and gaming industry, with a serious application into artificial intelligence, virtual reality, and self-driving technology. B2B has a small number of customers creating a disproportionate amount of revenue. In contrast, any version of iPhone sales has more than 50 million units sold in a year. B2B product cycles can be lengthy. For the iPhone product alone, Apple put out 8+ versions in last 10 years. On the downside risk, making the wrong choice in B2B purchases has a greater impact. But, the E-commerce has a lesser negative impact for B2B products. In summary, it stands to reason that NVIDIA has a higher business risk today than Apple or RIM back then.
3. Fundamentals Difference
At a glance of each company's fundamentals, at T = 0, it is clear that BlackBerry had an obvious advantage in fundamentals, compared with Apple and NVIDIA, in virtually all aspects except a slightly lower profit margin. BlackBerry had more than twice of the revenue and cash flow growths than NVIDIA under the same circumstance that both stocks have been advancing more than 200% in a short period.
(Source: Company 10Qs and Bloomberg)
4. Summary Estimates
That being said, then analysts were still realistic in formulating their forecasts even after exponentially high growth rates. BlackBerry's 98% historical revenue growth was reduced to 83% forecast for the following year, and for earnings, 105% was dropped to 48%. Both NVIDIA and Apple's forward estimates were cut into more than half from the past year actuals (38% to 16% for NVIDIA, and 66% to 30% for Apple). One year later, Apple's 2013 actual revenue growth beat by 15% and earnings by 2%, while BlackBerry's 2009's revenue missed by 3% and earnings by 1.20%, respectively. Of course, for NVIDIA, we shall wait till 2018.
5. Valuation Differences
Probably the more telling is the valuation story at each time point. Based on simple price multiples, it is clear that BlackBerry had the significantly higher valuations across all metrics. The NVIDIA long side may be a bit disturbed that, given less than half of the forward fundamental estimates and more business risk (B2B vs. B2C), NVIDIA's valuation is "disproportionately" closer to the higher-valued BlackBerry than to Apple. Whether NVDA is considered fairly valued will depend on your risk-reward tradeoff.
One silver lining is that the typical price multiples have been often criticized for being overly simplistic. The more sophisticated analyst estimates suggested that RIM was undervalued by 17% in 2008 and Apple was undervalued by 46% in 2012. Today, NVDA is considered to be undervalued by 12% by the analysts.
Where Did AAPL and BBRY Go After the Baseline?
As there is no such thing as "other things being equal," it may be frustrating that we cannot predict the drastically different outcomes of AAPL versus BBRY, which rest seemingly close on its respective product life cycle and relative fundamentals at the time. It is equally encouraging that nobody can predict the drastically different outcomes of AAPL versus BBRY, using all available information at the time. Hindsight is 2020. One "ex post" clue we can see is that the RIM's BlackBerry have experienced consecutive, negative revenue and earnings misses after 2008, while Apple had multiple beats after 2012. This resulted in reversing RIM's leading global market share 20% versus Apple's 11% at 2008 to RIM's 4% and Apple's 21% in 2013 (see Figure below).
This may help explain why AAPL advanced another 300% and BBRY nearly lost everything (see Figure below) in the following few years.
Finally, even Michael J. Fox could not go "Back to the Future" to alter the past. One takeaway from AAPL/BBRY's story is: the market is efficient enough that we all have to wait to see how NVIDIA's future growth will play out.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.