A Stock to Rival NVIDIA - EXPONENTIAL TECH INVESTOR - Brownstone Research
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EXPONENTIAL TECH INVESTOR A Stock to Rival NVIDIA
2
A Stock to Rival NVIDIA
By Jeff Brown, Editor, Exponential Tech Investor
It was February 2016… Linear vs. Exponential
I had been invited down to Exponential
Rancho Santana on the Pacific
coast of Nicaragua to speak to
a small group of wealthy in-
vestors and family offices. The
topic I discussed was a tech-
GROWTH
nology investment idea that Disruption
was safe enough for “family
money” but still offered in- Linear
credible upside.
Behind closed doors, in a small
conference room overlooking 0 TIME
the Pacific Ocean, I rose to ad- www.brownstoneresearch.com
dress the audience. I began:
To drive the point home, I showed this chart.
I’d like to talk a little bit about exponential
The point I was making is that humans are very
technology, for context…
good at understanding linear growth, the black
When you look at a typical graph, you see a line. And it’s not our fault. It’s basically pro-
very linear progression. So if you think about grammed into our DNA. We tend to think things
consumer electronics, how they just tend to will progress steadily, at more or less the same
increase and improve 5% a year, how your rate, year after year.
refrigerator gets 5% more energy-efficient
But most of us are not capable of grasping ex-
every year, or how automobiles improve
ponential growth – the blue line. Exponential
their fuel efficiency, that’s linear technologi-
growth sneaks up on us. It appears linear at
cal progression.
first, but then it reaches a sharp “elbow,” and the
Exponential’s very different. It means that trend goes nearly vertical.
every year or every two years, it keeps dou-
In hindsight, it’s easy to spot exponential
bling. You get to a point where you get to
growth.
the elbow of the curve and you start to really
accelerate in terms of what the technology is Exponential growth is the reason why it now
capable of doing. costs less than $1,000 to sequence a human
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genome today when it cost $100
million in 2001.
Exponential growth in the pro-
cessing power of semiconductors
is the reason why the smartphone
in our pocket has more comput-
ing power than the systems used
to send a man to the Moon.
And exponential growth is the
reason why companies like Ap-
ple, Amazon, and Netflix have
returned thousands of percent to
investors in the span of just a few
years.
As an investor, spotting exponen-
tial growth trends is one of the (Moore’s Law is the idea that computer process-
best ways to identify a truly life-changing invest- ing power doubles about every 18 to 24 months.)
ment opportunity. That’s what I presented on
I went on to say that Wall Street was not ac-
that day in Nicaragua, the day I recommended
counting for the exponential growth we were
NVIDIA (NVDA).
about to see in AI applications for data centers.
NVIDIA is a semiconductor company known And investors did not understand that NVID-
today for its graphics processing units (GPUs). IA’s products were perfect to accommodate this
NVIDIA’s GPUs are used today to run artificial demand.
intelligence (AI) programs, among other things.
But for investors who could appreciate expo-
We can think of them as the “workhorse” for AI
nential growth, this presented an incredible
applications in data centers today.
opportunity. Have a look at how NVIDIA has
I’m certain readers have heard of NVIDIA. It is performed since that day in 2016.
now the most valuable semiconductor company
From February 2016 to its recent peak, NVIDIA
in the world. CNBC covers it almost daily. It’s reg-
has returned 1,860%. For every $10,000 in-
ularly profiled in Bloomberg and The Wall Street
vested, we’d end up with $186,000. That’s an
Journal. But back in 2016, when I recommended
incredible return from one stock in just a few
the company, it was wildly misunderstood.
years. And it has everything to do with under-
From my presentation again: standing exponential growth.
NVIDIA, the company that I’m going to Now – at the right valuation – I still think
speak about, is a semiconductor company. NVIDIA is a great long-term investment. But the
And it’s governed by Moore’s Law… bulk of its exponential growth has already come
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and gone. At a certain size and scale, it gets any kind of messaging application)
harder and harder to double revenues. But in
this special report, I want to share with you the And 5G will be a historic improvement over 4G.
next exponential growth trend and reveal the Simply put, 5G will allow us to do things we
stock I believe could rival NVIDIA in the years could have never done before. Here’s a snapshot
ahead. of what it will mean for consumers:
• Typical speeds on a 5G network will be 1
The 5G Megatrend Gbps (gigabits per second), which is 40
The next exponential growth story that investors times faster than what a consumer expe-
need to pay attention to is fifth-generation wire- riences on average on a 4G network in the
less networks (5G). U.S. today.
Readers will likely be familiar with 5G by now. • Self-driving cars will be connected in real
I have been pounding the table on 5G for more time over wireless networks.
than three years – long before it was on the
• Companies will be piloting trucks for
mainstream’s radar.
logistics remotely, just as drones can be
5G is the next generation of wireless network flown from halfway around the world
technology. For context, here’s what each wire- over satellite networks.
less generation has enabled since 1G in 1983:
• We’ll be able to surf the internet and
• 1G (deployed in the 1980s): Analog make phone calls while riding on a high-
cellular technology, very low bandwidth, speed train up to 310 miles per hour (500
designed to enable mobile phone calls km/ hour).
• 2G (deployed in the 1990s): Digital cellu- • Consumers will be able to “sit in” on
lar technology, digital voice phone calls, meetings by projecting themselves using
enabled SMS (short messaging service – holographic images in real time with no
sending texts) video or audio delay.
• 3G (deployed in the 2000s): Widespread • The world’s top surgeons will be able to
use of CDMA (code-division multiple perform remote surgery on patients from
access) technology, high-quality audio anywhere in the world – distance will no
for calls, early stages of low-quality video longer be an inhibitor.
over mobile, and internet access
• And there will effectively be no latency
• 4G (deployed in the 2010s): Significant (delay) over 5G networks. Latency will
increase in data bandwidth, enabling drop by 99% from more than 100 mil-
internet browsing and streaming of liseconds down to a mere millisecond.
high-quality video, voice over IP technol- Latency like this would enable a doctor to
ogy (basically, free phone calls anywhere operate on a patient with robotic sur-
in the world using services like Skype or gery… over a wireless network.
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Here’s the important point for investors. It’s phones, tablets, personal computers, gaming
estimated that 5G will unlock up to $12.3 trillion consoles, augmented reality (AR) devices, and
in wealth across a range of industries. Make no virtual reality (VR) devices.
mistake. This will be one of the best investing
trends of the decade, an exponential growth sto- It’s natural to wonder what the connection is be-
ry that only comes around once a decade. tween 5G wireless technology and the software
that Unity develops.
And I’d like to share with readers the watchlist
company that will directly benefit from the ex- And the answer is that mobile gaming rep-
ponential growth of 5G in the years ahead. resents about 45% of the overall gaming market.
It is already an incredible $68.5 billion global
market. Almost 2.5 billion people play games on
An Important Note: This company is not
their mobile devices. And the total gaming mar-
currently a recommendation. As I show be-
ket will reach about $200 billion by 2022.
low, the valuation does not make sense right
now. For perspective, the gaming market is much
Investors buying at these levels would be tak- larger than the entire motion picture industry,
ing on too much risk and would likely end up which is estimated to be about a $103 billion
losing much of their investment. So let’s learn market.
about this company today, but my official rec-
ommendation is to wait for my buy alert. And with the rise of 5G and even faster wireless
internet speeds – combined with even more
immersive, social, and engaging gaming expe-
Watchlist Company: Unity Software (U) riences – we are going to see gaming absolutely
explode in the coming years.
Today, the gaming industry is nothing like it was
a decade ago. The industry used to be built on
gaming consoles plugged into TVs or software
Founded: 2004 that ran on our computers.
Headquarters: San Francisco, CA
Date of IPO: September 18, 2020 The consoles connected to the big cathode-ray
Enterprise Value: $23 billion tube (CRT) TVs, and they had very little memory
and computer processing power. The PC games
may have had a little more juice, but they were
The Company still limited to a very small market.
Unity Software provides a bleeding-edge gam- Under those circumstances, gaming just wasn’t
ing engine for creating interactive 3D games something that would move the needle from
and content. We can kind of think of Unity’s an investment standpoint. But that all changed
software as an operating system that developers with fourth-generation wireless technology (4G).
can build games on. Third-party developers can
use Unity to build immersive games for mobile 4G, combined with advanced smartphones,
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made sophisticated mobile games possible, and basic level costs $399 per person, per year. The
that brought gaming to the masses for the first mid-tier level costs $1,800 per person, per year.
time in history. And the high-end level costs $200 per person,
per month (with a 20 person minimum).
Now, instead of needing to hook up a bulky
console to a TV, consumers could simply down- Where Unity’s business model really kicks in is
load a free app on their smartphones. Then they when a game developer generates $100,000 or
could play their favorite games from anywhere, more in revenue, which is not much at all, from
anytime they wanted. a game. Once that happens, the developer must
pay for a “Pro” version license to Unity for every
As a result, gaming went from a niche industry person in their company.
to a mass market.
On the next page is a visual of what these tiers
Think about this – back in 2011, less than 26% provide.
of Americans played games on their mobile
phones. Fast forward to today, and nearly 64% And in what I see as a very shrewd move, Unity
of Americans play games on their smartphones allows students and individuals limited access to
at least once per month. Gaming has seen an its platform for free. By allowing aspiring de-
incredible surge. velopers to experiment with its gaming engine,
Unity sows the seeds of future demand. What a
This explosion in demand opened the door for great model.
Unity Software to become a dominant player in
the space. After all, why would a gaming com- So Unity can thank 4G for the tremendous suc-
pany spend millions of dollars creating a new cess it has had over the last decade.
gaming engine for its next game when it can
simply license the industry’s best engine from But when it comes to real-time, social, lag-free
Unity and build on top of it? gaming, 4G has a glaring weakness. The per-
formance is not good enough to power massive
And that’s the brilliance of Unity’s business multiplayer experiences. Yet that’s the direction
model. the gaming industry is going today.
Producing individual games can be a hit-or-miss
effort for gaming companies. It’s almost like the 5G Will Send Gaming Revenues
movie business. Some titles do great, and oth- Soaring Higher
ers are flops. Unity chose to focus on building I suspect many readers may not be familiar with
the platform on which games can be built. That a game called Roblox. It’s an online game for
means that no matter what happens, Unity wins. kids that looks like a throwback from 20 years
ago. It’s simple, and the graphics are not at all
In this way, Unity Software is a “picks and shov-
lifelike. They are blocky and cartoonish.
els” play on the gaming industry.
For those companies interested in its platform,
Unity offers a tiered pricing model. The most
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Roblox Graphics can “friend” each other inside the game. And
they talk to each other over wireless headsets.
So Roblox is really a social environment for kids
where real friendships are formed. And existing
friends connect online after school or in the eve-
ning. That’s why it is so sticky.
In fact, the game now boasts over 150 million
active monthly users. That’s a lot of people run-
ning around a virtual world together.
Source: Roblox
The beauty of these MMO games is that players
While it may not look like much, Roblox is are free to organize their own events inside the
incredibly “sticky.” In fact, it is one of the most virtual world. Famous rapper Travis Scott did
popular games in history. It’s a massively mul- just that during the COVID-19 lockdowns back
tiplayer online game (MMO) that features many in April.
large, open worlds. Players create an avatar to
wander around these worlds, interacting with Scott organized a massive concert inside Fort-
the landscape and fighting cartoon monsters nite, which is another incredibly popular mul-
and opponents along the way. tiplayer game. Fortnite now boasts over 350
million registered users around the world.
But most importantly, players go to the worlds
to hang out with each other. Roblox has become And each of those 350 million people had the
a social place for kids to meet up and chat. They opportunity to see Scott perform inside the vir-
tual world. It was quite the performance…
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Travis Scott in Fortnite But not with 4G.
4G doesn’t have the speed, bandwidth, or laten-
cy to support a mobile game in which there are
thousands or even millions of people moving
around and interacting at the same time.
Even if consumers can access an MMO over 4G,
the experience will not be good. The content
won’t be smooth. Instead, it will come across
as jittery. And players will experience latency
when they try to perform an action themselves
– gamers call this lag. There will be a delay
Source: Riot Games via Polygon between pressing the button and the associated
action happening on the screen.
Not only did Travis Scott have a digital repre-
sentation of himself jumping around and per- To avoid this poor experience today, users must
forming, but the concert also featured creative play popular multiplayer games using fixed
special effects. broadband internet. That likely means from a
stationary personal computer with a wired inter-
Lightning storms happened in the background,
net connection.
backup dancers appeared to be made of fire,
and the show even inverted gravity at one point. And that’s precisely why 5G is set to amplify
Players suddenly flipped upside down and start- gaming revenues. 5G is going to unlock full
ed floating. functionality for the world’s top multiplayer
games on mobile phones and tablets from pret-
And get this – 27.7 million players showed up
ty much anywhere. No need to be tethered to a
to watch this concert. That makes it the largest
desk with a fixed, wired internet connection.
concert in history by a wide margin.
That will drive the adoption of games like Ro-
If we compare this to traditional venues, most
blox and Fortnite. And it will also create a dy-
outdoor stadiums hold less than 100,000 peo-
namic where we will see all kinds of live events,
ple. Indoor arenas hold even less.
like Travis Scott’s concert, move to a virtual
Then, if we compare this to the top televised world.
sporting events – the Stanley Cup got 5.4 mil-
Concerts, movie premieres, Broadway theatre,
lion viewers last year. And the World Series got
and even live sporting events will eventually be
an average of 13.9 million viewers. Travis Scott’s
viewable from within a virtual environment sim-
virtual concert beat both combined.
ilar to these games. And it’s all thanks to 5G.
The writing is on the wall… This is the future
Because Unity is far and away the industry’s top
of entertainment. And it won’t just be concerts.
mobile gaming engine, we can be sure that it
Soon we’ll be able to experience all our favorite
will see exponential growth in the years to come.
events inside a virtual world.
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Unity Software is the perfect 5G play on the with every initial public offering (IPO).
gaming industry.
Once the lock-up period expires next March, the
VCs will be scrambling to sell and capture their
Wait for the Magic Window to massive profits. The earliest VCs who invested
Open back in 2011, when Unity was valued at $150
That said, I cannot recommend Unity Software million, stand to make over 15,000% on their
at current levels. investment. We can be sure they will do so.
The company just went public on September 18 And that means we will see Unity’s share price
at $52 per share, valuing the company at $13.7 fall significantly in the weeks leading up to its
billion. The stock has since rocketed up to over lock-up expiration date in March. And it will
$91 per share, giving Unity Software an enter- likely continue to fall in the weeks following
prise value of $23 billion. lock-up expiration.
But if we look at Unity’s financials, it only gen- That’s when it will be time to strike.
erated $541 million in revenue last year. This
While I can’t recommend Unity Software to-
calendar year’s forecast is for $737 million in
day, I can tell you that this company will make
revenue.
a fantastic investment once investors can buy
Using the forecast for this year, Unity is current- into this story at a reasonable valuation. That’s
ly trading at an enterprise value-to-sales (EV/ something I will be watching closely early next
sales) of nearly 32.75. year.
That’s a valuation equivalent to almost 33 years Regards,
of sales, not profits. For perspective, some of the
Jeff Brown
world’s top software companies today are trad-
Editor, Exponential Tech Investor
ing at an EV/sales of just over 10. While Unity’s
valuation isn’t as ridiculous as some others in P.S. Anyone who missed my "Beyond Exponential"
the market, it is still vulnerable to a major pull- investment summit can click right here or on the
back on the slightest disappointment in forward image below to watch a replay... and discover how
you can build a million-dollar tech portfolio – from
guidance.
scratch – in today’s market.
Investors buying Unity Software today are pret-
ty much guaranteed to lose money in the short
term. And I use such strong language because
the insiders – the venture capitalists (VC) who
invested in Unity Software when it was a private
company – are legally restricted from selling any
shares until March 2021.
That’s the lock-up period, and it comes standard
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