Motley Fool Hidden Gems Investing - Nvidia’s Next Big Growth Lever?

Starting point is 00:00:00 What is NVIDIA's next big growth lever? You're listening to Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. My name is John Quast, and I'm joined today by Foolish contributors, Rachel Warren and Matt Frankel. And we have a couple of things to talk about on the show today. We're going to talk about passive investing. We're going to talk about a deal in the home builder market. But first, we're going to talk about the bell of the ball and that is nvidia nvidia over the weekend in taipei having a conference event where they announced many things as they are want to do but one of the big announcements coming out from nvidia over the weekend was its new vera cpu now i know full well that nvidia is not a hidden

Starting point is 00:00:49 company it's the largest publicly traded company in the world but the business has boomed with gpus or these graphic processing units, this is an announcement for a CPU, a central processing unit, and that's not an area that NVIDIA dominates. Actually, that space is dominated by AMD and Intel, and we'll get to that side of the story here in just a moment. But first, I mean, let's talk about this, Matt. What is NVIDIA's pitch to its customers here on why it should potentially switch to its own CPUs instead of that of competitors? Yeah, so at a high level, this new chip combines one of NVIDIA's Blackwell GPUs, which you could find in PCs today, with an ARM architecture-based CPU designed by a company called MediaTek, which NVIDIA is partnering on to make this.

Starting point is 00:01:35 It's clearly designed to handle AI workloads better than the processors that you see from Intel and AMD, which own over 90% of the market today. NVIDIA claims, for example, it's going to deliver RTX-class gaming, which is the high-end gaming PCs that you've probably seen at Best Buy things like that, in very thin Windows laptops. It's part of NVIDIA's collaboration with Microsoft. I know it's really tough to keep track of all of NVIDIA's various collaborations going on right now, but it made one with Microsoft to essentially reinvent the PC, and this is part of that. It's designed to be a high-end processor. That's the key word. This isn't the $400 laptops. Designed for avid gamers and professionals who really need the ability to multitask and do

Starting point is 00:02:17 complex workloads. Yeah, I think those are really good points that Matt makes. But I think as well, to follow up on that, you know, NVIDIA is making this pitch with the Vera CPU, really kind of trying to fundamentally change what a CPU is supposed to do in this increasingly agentic era of AI. I mean, one of the things here as well to note is NVIDIA is essentially telling data center clients that their old architecture has become a massive bottleneck. So you think of how powerful GPUs handle the core thinking of AI. Autonomous agents also need to execute code, search databases, and really manage these multi-step loops. And we're in a time where legacy CPUs, they crumble under that heavy coordination workload, and it leaves these

Starting point is 00:03:03 very expensive GPUs waiting around idly. So NVIDIA is pitching what is essentially a specialized traffic controller that runs these agentic environments almost two times faster than traditional alternatives. So I think that's something else that's really important to take away from this announcement. Yeah, and I want to go a little bit more hidden gems here beneath the surface as we talk about this. And so both Matt and Rachel alluding to this, not all CPUs are created equal. Intel and AMD, as Matt pointed out, 90% of the market essentially, maybe even a little bit higher than that but it's built on a certain kind of architecture that many of us including myself don't normally think about it's not something that is right there on the surface

Starting point is 00:03:48 but it's using that x86 architecture and basically it's completely different the way that nvidia is approaching it approaching it with the arm architecture and so that does create some i think that in the past investors have always viewed amd and intel as kind of this defensible moat here because its customers would have to change the architecture. They can't just plug in NVIDIA's CPUs and it's apples for apples switch. No, you're also changing the architecture that goes behind that. But kind of these, as you pointed out, Rachel, these more agentic workflows. So this is the big trend in AI. The third wave, as Jensen Wong called it. These AI agents, it's creating a exponential increase in need for the CPUs. And so that's really what it's

Starting point is 00:04:35 trying to address here. I don't know. Guys, what do you think? Is this something that is actually going to cause customers to switch from AMD Intel to a more ARM-based architecture? Matt, what do you think? Well, yes and no. At least initially, this is going to be a very high-end product. And it's really important to point out what we don't know yet. One thing we don't know yet is pricing. We don't know how much this is going to cost. If laptops with this chip cost $2,500, they're only going to capture a very small part of the market. It's also worth pointing out we don't have any real-world performance data from these chips yet, only what NVIDIA says. There's no third-party data or anything like that like we have for Intels and AMDs.

Starting point is 00:05:20 For the time being, I really see this chip fulfilling a niche, not capturing a big share of the PC market. I still see AMD and Intel as having a pretty defensible moat, essentially a duopoly in the CPU space for PCs. I mean, Qualcomm already has an ARM architecture processor in the PC market. It's available in dozens of laptop and PC models. Few people even realize that. I didn't realize it until I went to shop for a new laptop a couple weeks ago. Qualcomm says it has a 10% share of the $800 plus U.S. Windows laptop market. That's not the lion's share of the laptop market. Most people who buy laptops spend less than $800. So in reality, they have a low single-digit share of this market. NVIDIA has its name. It does have that going for it, but it's going to be a very

Starting point is 00:06:08 high-end product at first, and I could see a single-digit share, at least in the next few years. Yeah, I don't think this is a winner-takes-all scenario, and I also think it's becoming increasingly clear that NVIDIA is really carving out its own path within this market. That being said, I think investors in the market for a long time have viewed Intel and AMD's architecture as sort of this unbreachable mode, right? Because rewriting legacy enterprise software to run on ARM chips was a multi-million dollar endeavor, if not more. But NVIDIA is essentially bypassing this barrier. They're targeting what is the increasingly multi-billion dollar infrastructure are built exclusively for AI factories, which I alluded to earlier, you know, rather than

Starting point is 00:06:49 fighting to replace legacy enterprise databases. NVIDIA is essentially carving their own path forward. And a lot of this is being made inevitable by the way they're leveraging their AI ecosystem monopoly. So the ARM-based Vera CPU, it comes really tightly integrated into the hyper-advanced Vera Rubin platforms via proprietary connections. So if you're a cloud provider or Titan, like OpenAI, like Anthropic, you know, trying to force a traditional processor into this unified system could drastically destroy computing speed. And so by integrating Vera flawlessly with their new Vera Rubin superchips, NVIDIA is essentially offering a completely unified ecosystem. And that could create a really durable advantage for them in this space

Starting point is 00:07:37 looking ahead over the next several years. All right, so let's just get to the bottom line here as we close out this topic after nvidia's announcement here for the vera cpu are you worried for intel and or amd matt you go first for amd not really and for two big reasons for number one amd cpus are meant for the masses not just hardcore gamers and multitaskers creative professionals you can get a great amd processor on a laptop for about five or six hundred dollars right now. Second, CPUs are becoming much less of the bull case for AMD. It has tremendous momentum in the data center space right now. So for PCs and laptops, it's still a big part of the business, more so than NVIDIA, but it's not a big part of the growth thesis anymore, especially like it was.

Starting point is 00:08:26 With Intel, the jury's still out. That stock has run up so much, but it's really based on future potential, not any sales that it's generating so far. For the time being, Intel's revenue is heavily reliant on its CPU business. So I think as far as revenue goes, Intel could be the most impacted here. But will the market care stock price wise? Probably not because of all of that future potential bacon. Rachel, how about you? Yeah, I think at least in the near term, that's true in terms of how share prices will respond. I think it's also important to note, you know, NVIDIA, they're projecting $20 billion in CPU revenue this fiscal year. So they are aiming to capture a significant portion of the server CPU market.

Starting point is 00:09:08 And we already have independent benchmarks that are showing that their custom design outperforms Intel's flagship design by over 55%. It edges out AMD's top chip by 11% in raw enterprise workloads. And the idea here is that by eliminating some of the latency delays caused by AMD and Intel's multi-chiplet setups, that NVIDIA can really challenge that historic performance monopoly that their chips have held for decades. What that looks like in the long run, I think, still remains to be seen. But I think investors have also learned that it's a mistake to bet against the success of NVIDIA.

Starting point is 00:09:44 So the competitive landscape is very much shifting. And NVIDIA is really leveraging, importantly, and I think this is one of the biggest takeaways, they're leveraging the Vera CPU to really push for full vertical integration. So if a data center wants the hyper-advanced Vera Rubin platform, they have to buy a complete proprietary package. the Rubin GPUs and the Vera CPUs bundled together. And I think that's going to also create a lot of growth tailwinds. Well, after the break, we're going to be talking about

Starting point is 00:10:11 one of the world's largest bank accounts. It's actually finally spending some money. You're listening to Motley Fool Hidden Gems Investing. smart bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today, because we have your number. Welcome back to Motley Fool Hidden Gems Investing. So Berkshire Hathaway, I know this is also not a hidden company. This is a trillion-dollar conglomerate. But over the weekend, it announced

Starting point is 00:11:04 that it is acquiring a home builder. That's Taylor Morrison for $8.5 billion. I think that's the total enterprise value of the deal. This is actually the largest deal that Berkshire has made since it bought Oxy Chemical last year for $9.7 billion. Now, I mean, $8.5 billion in relation to how much cash Berkshire has, it's almost a rounding error. But relatively speaking, this is a huge deal and one of the bigger ones from Berkshire in a while. And so I think it's really interesting because many investors out there are selling shares of home builders these days.

Starting point is 00:11:39 It is, and it's also notable. It's the first kind of major acquisition engineered by Buffett's successor, CEO Greg Abel. It's something of a counter-cyclical bet right now in the current macro environment. But I think what I take away from this is Berkshire is capitalizing on what is still a very long term structural reality. America is facing a massive multi-year

Starting point is 00:12:02 backlog of housing demand. Obviously, that has been suppressed by high interest rates. But in the lifespan of the market, it's a temporary blip on the radar. So what's interesting, taking Taylor Morrison private in this purchase, they're not just buying a builder across 350 communities, which is notable, but they're also absorbing a very lucrative internal financial services arm. That arm provides in-house mortgages, titles, insurance. It plugs really well into their existing housing giant, Clayton Homes. And as you noted, John, very much leveraging this unmatched cash hoard that they have on their balance sheet. They're buying a top tier builder to discount. I think that they are trying to position themselves to dominate that inevitable

Starting point is 00:12:43 construction upcycle when it comes. It's a contrarian play for sure, but it's one that I love. I've discussed many times on these shows, I'm a big fan of the home building space from a long-term perspective. Even with the premium Berkshires paying for Taylor Morrison, I think it was like almost 30% above the share price. It's still getting it at something like eight times EBITDA. To be clear, the home building industry is terrible right now. I can't really stress that enough. There are more than 500,000 unsold homes being held by builders right now. That is the most that we've seen since the financial crisis era. Sales are slow. Mortgage rates are high. Builders are having to heavily incentivize buyers to move houses. But the long-term bull case is compelling.

Starting point is 00:13:26 There's a shortage of about 4 million homes in the United States right now. About a million of those would be single-family homes, single-family units like Taylor Morrison produces. There's pent-up demand from buyers and sellers who essentially feel stuck in place by high mortgage rates or sidelined just priced out due to high mortgage rates. And there are excellent profitability economics in home building right now, even after all those incentives I mentioned, due to all that home price appreciation we've seen since 2019, 2020. So I really like this bet long term. Yeah, I think that Berkshire Hathaway, I think this is fair to say, is anything but a momentum trader, right? If Berkshire was going with momentum, it might be buying a CPU stock right

Starting point is 00:14:10 now, but definitely the homebuilders are down. It's looking for value and it's taking that contrarian bet here. Warren Buffett, of course, he's no longer in charge of the decision making, but Warren Buffett once said, we are willing to look foolish as long as we don't feel we have acted foolishly. And I think that's an interesting thing here. Many investors look to Berkshire Hathaway. What is it doing? Berkshire Hathaway might look foolish for a little while here, But do you think that it's acted foolishly in acquiring a home builder, Rachel? Oh, I don't think so. I don't think they're acting foolishly here at all.

Starting point is 00:14:45 I actually think this is really kind of a textbook example of the really core value investing principles that built Berkshire to what it is. Very much goes back to the mindset of, of course, the great Warren Buffett when it came to investing in value oriented businesses. And I think we often see the short term markets, they tend to panic over temporary macro conditions and understandably so. But I think Berkshire is very much thinking in decades and they are capitalizing on a massive and undeniable structural shortage of American housing. And, you know, paying $72.50 a share for a very profitable national developer, this is essentially allowing Greg Abel to deploy a small fraction of Berkshire's cash flow, which is about $400 billion, I think, at last count, in a business that really fits perfectly into their existing housing ecosystem. All note, Buffett himself actively praised Abel's execution on the deal. He emphasized it was done smoother and faster than he could have managed. So I think that's as much of a Buffett stamp of approval as one could hope for, and also

Starting point is 00:15:50 seems to very much speak to the overall strategy of CEO Greg Abel. Yeah, just one quick thing. I wouldn't be surprised if there were more home builders in Berkshire's acquisition pipeline. Think of the other real estate business that has Berkshire Hathaway Home Services. there were a bunch of different smaller ones consolidated into that. It's entirely possible with this deal that Berkshire could look foolish for a while. If mortgage rates rise even further, for example, which given where inflation is right now is entirely possible, the housing market could

Starting point is 00:16:20 get even slower in the near term. I believe the general direction of mortgage rates and interest rates in general over the next few years is going to be lower. That doesn't mean it's going to be a straight line. And to be clear, I'm willing to temporarily look foolish alongside Berkshire. Homebuilders are one of the largest industries represented in my own stock portfolio right now. And so I think I hear Matt saying maybe some good bargains out there in the homebuilder category. Just make sure you're taking that long-term view and not get dissatisfied with short-term results. After the break, we're going to talk about the rise of passive investing. You're listening to Motley Fool Hidden Gems Investing.

Starting point is 00:17:00 welcome back to motley fool hidden gems investing one quick note we want to make you part of the conversation if you have any questions for matt rachel myself anything having to do with this show you can email us at podcast at fool.com and we'd love to hear from you we'd love to read your questions on air remember to keep them foolish that email again is podcast at fool.com podcast at fool.com. We are going to the mailbag today. And this question came in from a listener named Alex. I had to tighten it up a little bit. It was kind of long and there were several questions embedded. But here's my best attempt at summarizing this question for the podcast here. There's been a huge shift from active investing to passive index funds over the last 25 years. How has that

Starting point is 00:17:50 changed how the stock market behaves. And so the question here is, does the automatic buying of index funds help prop up the market and make the bull runs longer during the good times? In a crash, does it make the floor stronger because people leave the money alone or does it make things worse? What does passive investing do to market dynamics? That's really the heart of the question here. And just to make sure we're all clear, you can invest in companies directly, that's more the active investing, or you can just buy an index fund or an ETF, which own the shares. And so that's more of the passive angle. Rachel, we're going to you first here. Yeah, I mean, there's a few ways to think about this. So market cap indexes allocate capital

Starting point is 00:18:33 based strictly on a company size. So automatic retirement contributions end up flowing disproportionately into really a handful of those large make a cap stocks. So in the short term, that can create a self-reinforcing loop that can prop up some of the index valuations and extend bull markets, even if the broader economy starts to soften. But the flip side of that is during a downturn, that is a system that can introduce some fragility. If investors start pulling money out, index managers are forced to sell off underlying stocks to raise that cash. Now, because the pool of active stock pickers has shrunk quite a bit over the last few decades, there aren't necessarily always enough individual buyers to absorb that selling pressure.

Starting point is 00:19:14 So the structural shift that you can see in those periods, it can turn those standard corrections into maybe sharper sell-offs, particularly of certain companies that a lot of market investors follow. But the silver lining here, that automated selling really drives down prices regardless of a company's actual financial health. And as long-term investors, we know it's important to really focus on the underlying health of the business. That generally drives outperforming results over the long run. I think if you're a patient investor, you're focused on the fundamentals, those distortions can create excellent entry points into really high-quality cash-flowing businesses. But absolutely, there is an impact, and it's really important to understand how that can trickle down into the stocks that you own. I agree with most of what Rachel said there. I'm going to push back on one thing, and that's that the pool of active stock pickers has shrunk over the last 25 years. So, yes, in terms of the number of people trading actively, that's absolutely true. but at the same time it's become exponentially easier to trade so you're seeing high volumes

Starting point is 00:20:19 higher volumes on a per person basis think you know what did you pay in commission for a stock in 2000 compared to today it was i think 14.99 is what i used to pay uh automated investment platforms have made it so much easier to just set your trade people can be trading while they're at work without even looking at their at their systems uh algorithmic trading platforms the trading frequency has become a lot more but that's all to say the whole reason i'm pushing back is not to pick on Rachel. It's to say that there's evidence to both sides of that question. Does automatic buying prop up the market? How does it affect the market? Things like that. So, for example, there was Harvard research done that says the average stock reacts less to earnings

Starting point is 00:20:58 than it did 20 years ago. And that's because of all of the index funds and passive investing that doesn't immediately react to earnings reports. There's evidence that stocks in the same index, say the S&P 500, tend to move more in sync than they did years ago because index funds are buying and selling them like a basket, which as Rachel correctly pointed out. It's also clear that getting added to or dropped from an index can move a stock much more than it did 20 years ago. But on the other hand, some of the most respected index fund leaders like Jack Bogle, who unfortunately is no longer with us, have regularly argued that passive indexing largely doesn't affect stock prices? It's a tough question to answer, but one thing's clear, the rise of index

Starting point is 00:21:42 funds is real and it has dramatically changed certain dynamics of the stock market in several big ways. So Matt, I'm going to throw you a surprise question here at the end. This is the final word. Does it make up something that you pay attention to with your own investing process? Why or why not? Yes, but not for the reasons you might think. It's because I invested a lot of companies that are like on the cusp of being added to some of the bigger indexes. You know, I'm more of a small cap investor than most people are here around the Motley Fool. So I had two stocks in my portfolio added to the S&P 500 within the past year. So I pay attention to it for those reasons.

Starting point is 00:22:18 The S&P 500 index funds and the Vanguard version has over a trillion dollars of capital invested in it all by itself. There are three companies that own 20% of the S&P through their passive index funds. so when a company jumps from a smaller index like the russell 2000 or the you know the s&p mid-cap 400 to the s&p 500 it really can have a big impact on their share prices so not that it's a big part of my investment thesis but for certain companies in my portfolio you know at being added or removed from an index is definitely something i watch yeah we'll definitely take a jump on that news if we can right well that's all the time that we have for today as always people on the program

Starting point is 00:23:00 may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer, Dan Boyd, and the rest of The Motley Fool team behind the glass. For Matt, Rachel, and myself. Thank you so much for listening to our show today, and we'll see you next time.

Motley Fool Hidden Gems Investing - Nvidia’s Next Big Growth Lever?

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