NVIDIA (NVDA) goes after 5 "specialized markets": Gaming (by far the largest), Professional Visualization, Datacenter, Automotive, and OEM & IP. Automotive is the smallest at just 7% of total revenue and perhaps the easiest to overlook.
However, at least this week, all eyes should be on NVDA's Automotive business due to the Automobil Elektronik Kongress, which took place on 6/27 and 6/28. Currently, as the only "game in town" on the AI chip side, all eyes were on NVDA, and NVDA did not disappoint. This week, NVDA expanded engagements with Volvo, Autoliv, ZF, HELLA, and VW.
Let's quickly go over the significant automotive news announced this week.
On 6/26, NVDA announced that they will team up Volvo Cars and Autoliv to develop next-generation self-driving car technologies. Production vehicles built on NVIDIA DRIVE PX are planned for sale by 2021.
On 6/26, NVDA announced that they will partner with ZF and HELLA to deliver AI technology with the New Car Assessment Program (OTCQB:NCAP) safety certification for the mass deployment of self-driving vehicles.
On 6/27, Volkswagen announced that it will partner with NVIDIA to drive its deep learning capabilities, which, according to Volkswagen's CIO, is "the key to the digital future of the Volkswagen Group".
Recall that NVDA announced partnerships with ZF, Bosch, Mercedes-Benz, Volvo and Audi during CES and a partnership with Toyota during NVDA's analyst day. Over 80 automakers (yes, it includes Tesla) and tier 1 suppliers are using NVDA's DRIVE PX system to develop autonomous systems. NVDA also has a partnership with Baidu and TomTom mapping technologies.
In other words, NVDA is quickly dominating one of the most exciting technology themes known to investors: the advent of AI-powered, autonomous vehicles.
However, consensus estimates are only expecting low-20% growth rate in Auto in FY18 and FY19, 19% growth in FY20, and only 4% growth in FY21 (ended January 2021). Given that the automotive industry is clearly moving towards AI, this appears to be an extremely conservative forecast, one that can easily be beat.
How big can NVDA's automotive business get? The simple is "I don't know. Nobody really knows. But I can take an educated guess."
According to IHS, only 8% of new vehicles in 2015 has AI systems. IHS forecasts 109% of vehicles to contain AI systems by 2025 (over 100% due to, on average, more than 1 systems per vehicle - its weird, I know).
NVDA believes self-driving cars is a 20M unit, $8B revenue opportunity by 2025. Recall that just a year ago, NVDA thought the opportunity is $4B to $8B.
If NVDA captures 25% of the 2025 market, that is $2B in revenue. The 4-analyst estimate for NVDA's Auto business by FY20 (effectively, calendar year 2019) stands at just $866, which implies a 24% CAGR through the next 5 years. More likely, the consensus estimates are much too low and simply does not reflect the geometric growth in AI-power self-driving vehicles.
However, if we look beyond 2025 to, say, 2050, the story gets even bigger. According to Elon Musk, there are 2 billion cars the world, the annual new car production capacity is 100 million, so it will take about 20 years for all cars in the world to be self-driving cars. Given the obvious advantages of self-driving cars even in its current state, it isn't difficult to conclude that nearly all new cars will be self-driving, however, we all know Musk is predictably overoptimistic about timing, which is why I picked 2050.
If we assume that by 2050, the run-rate for new car production is 100M, all of which includes at least 1 AI system, then NVDA's unit TAM increases 5x from 2025 to 2050. Further, if we assume that each year pricing goes up by 3% while content goes up by 5% (i.e. 8% compounded for 25 years), then NVDA's dollar TAM will be $274B by 2050, for a 25-year CAGR of 15%.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.