Hewlett Packard Enterprise Co. (NYSE:HPE) stunned Wall Street on May 17 with important merger news.
That’s when the company announced it was joining forces with another historic computing firm.
See, HPE is a spinoff of the storied Hewlett Packard, one of Silicon Valley’s early computing pioneers. It said last Friday it is buying supercomputing legend Cray for about $1.4 billion.
Here’s the thing. HPE is making the move because it wants greater access to a lucrative tech platform we’ve been talking about for some time now – artificial intelligence (AI).
The timing is great. IDC says worldwide spending on AI systems will jump 44% this year to $35.8 billion.
And this ranks as a twofer. Cray remains a supercomputing powerhouse. It has won a string of government contracts over the years, which will give HPE a stable sales base.
Cray just scored a $600 million Department of Energy contract to build what is expected to be the world’s fastest supercomputer.
Let’s not forget that supercomputers play a critical role in AI, which requires massive processing power.
And today, I’m going to tell you of a hidden way to play this exciting AI merger.
What AI Can Do
It’s hard to fathom just how much AI-driven supercomputing will change our lives. AI can dive deep into massive swaths of data to find important patterns, like fraud, crime or imminent weather events.
It’s also used in machine learning that is sweeping factories all over the world.
No wonder the economic impact will be so stunning. In the U.S. alone, AI will boost our economic growth rate from 2.6% to 4.6% by 2035. That translates into an additional $8.3 trillion in economic activity, says Accenture.
Hewlett Packard Enterprise split off from its parent in November 2015 to better focus on advanced tech segments. Bringing in $30 billion in sales, HPE is focused on servers, storage, networking, consulting and support.
We got a sense of the firm’s robust ambitions in August 2016, when it bought another legendary computing house. HPE acquired Silicon Graphics International for $275 million, moving it deeper into big data analytics and high performance computing.
Yet the recent purchase of Cray is the real crown jewel here. Cray ranks fourth in supercomputing systems, with 49 systems.
It also recently received another mega-contract from the federal government, a $500 million system for Argonne National Laboratory.
But as much as I’m a fan of this merger, I want to be very candid with you. I believe there is a better play out there on the burgeoning AI market.
And it’s one that is largely hidden from Wall Street these days, even though it’s profiting from a major shift in supercomputing and AI.
This field has always been made up of firms building massive machines that can fill an entire room.
Tomorrow’s era of supercomputing will be driven by just one – or a small handful of – semiconductors.
Dominating the AI Market
Nvidia Corp. (Nasdaq:NVDA) has built the world’s most advanced AI-focused chips, setting itself up for market-beating growth for years to come.
Just think, it was only four years ago that Wall Street thought of this Silicon Valley leader as mainly a maker of graphics cards for gaming consoles.
Now, Nvidia’s AI chips have come to dominate a market that is simply exploding.
Sales of such chips are expected to double this year, to around $8 billion, and reach more than $34 billion by 2023, according to Gartner projections. The forecasting firm says that Nvidia owns 75% of the market.
Nvidia didn’t just develop one AI chip and unleash it on the market for all applications that used to be handled by supercomputers. Instead, the firm is working to make its portfolio of chips more flexible for clients by customizing them for various tasks.
Take the coming era of autonomous cars. In the past, the only way such an advanced vehicle could function would have been by putting a giant supercomputer under the hood.
Obviously, that’s not practical, and explains why self-driving cars couldn’t have been possible a decade ago.
Now, car makers are lining up to buy the Nvidia Drive AGX platform. It’s based on a series of chips that enable key self-driving functions, such as sensor fusion and perception.
Nvidia’s “supercomputers on a chip” are finding a growing range of uses.
Across major cities, for example, you’ll find 500 million sensors and cameras that relay massive amounts of information back to city planners. Nvidia’s AI platform helps transform that data into usable real-time analytics.
In healthcare, Nvidia’s AI chips are seeing a range of new applications. We’re talking everything from medical imaging to analyzing genomes to discovering new drugs.
And retailers are using Nvidia’s AI chips and software to optimize supply chains. This allows clients to customize shopping experiences and deploy real-time pricing adjustments to boost sales.
Nvidia also is a major player in the emerging field of virtual reality. The firm’s Pascal line of chips bring a heightened realism for sight, sound and touch in these next-gen entertainment systems.
The company has clearly benefited from its early adoption of supercomputer-like chips. Its sales have shot up from $5 billion in 2016 to nearly $12 billion last year.
Once again, Wall Street is out sync with this tech leader. Spotting that Nvidia will see a lull in growth this year, the Street helped push shares down from $280 last September to a recent $153.
A Turnaround At Hand
And that hands us a great buying opportunity.
You see, Nvidia will be right back on the high end of the growth curve next year. Sales should once again be growing in excess of 20% per year. Equally impressive, Nvidia’s earnings are expected to spike 35% next year.
That kind of growth is the payoff for a firm that spends nearly $2.5 billion in R&D each year.
As much as I will always respect the amazing history at Cray and Hewlett Packard, I think Nvidia gives us access to a broader part of the AI market.
Yes, its chips are that powerful.
Over the past three years, it has grown earnings per share by 59%. At that rate, they will double in less than two years, giving this stock a lot of upside.
In other words, NVDA provides savvy tech investors a great “special situation.”
By buying shares before Wall Street wakes up to the great AI and supercomputing story here, you are setting yourself up for very profitable long-term holding.
An Amazing “High-Speed” Opportunity
Wall Street also is sleeping at the wheel when it comes to 5G wireless cellular technology, its blazing fast speed and latency upgrades, and the profit potential behind a company with a bead on the expected $12 trillion market this technology opens up.
Getting in at the right time could change your financial life in ways that most people only dream about.
Cheers and good investing,
Michael A. Robinson