One of the appealing things about investing in Nvidia (NASDAQ:NVDA) stock is that you get massive built-in diversification. The company has gaming, 5G, data centers, autonomous driving, artificial intelligence, and more. And by having its leading-edge technology, it often ends up in the right place at the right time to ride other hot trends, such as the crypto-mining boom of 2017-18. With the right technology, it unlocks a lot of possibilities in emerging product categories.
But even those accustomed to Nvidia’s wide-reaching approach may have been surprised earlier this month. That’s because Nvidia presented at the J.P. Morgan Healthcare Conference, making major moves into the medical industry. What does a company whose roots are in video gaming have to do with our healthcare system? More than you may realize.
Nvidia Buys Parabricks
In December, the company announced that it was acquiring Parabricks for an undisclosed sum. Parabricks created technology that uses advanced graphical processing units made by Nvidia to analyze entire genomes in less than one hour.
Parabricks claims that it can speed up workflow in the genomics space by up to one-hundred fold. It will soon launch similar technology for analyzing RNA and individual cells as well.
This is crucial enough that NVDA CEO Jensen Huang himself informed the world of the Parabricks acquisition. Additionally, Kimberly Powell, the company’s vice president of healthcare, tweeted:
“2020 is going to be the breakout year for genomics, we are delighted to bring a strong roadmap of AI and analytics tools to the community with NVIDIA Parabricks.”
Nvidia’s Vision
Nvidia further laid out its health care plans at the JP Morgan Healthcare conference earlier this month. There, they reminded listeners that NVDA has been involved in healthcare for the past decade. They became particularly interested in the field after artificial intelligence detected mitosis (cell division crucial to cancer diagnostics) in a deep learning exercise in 2013.
Nvidia has been building on its AI expertise within healthcare over the years. This led into the creation of their Clara platform, which the company described as a:
[D]omain-targeted AI application framework. What does that mean? What that means is we have built a whole software application suite that allows you to bring domain expertise into a software platform already built for you, and create an AI application. It’s almost like zero coding. We’ve written all the software for you to be able to label the data, transfer learn on that data, and then deploy that data to a computing platform.
If the company can drive widespread adoption of this platform, it could generate massive profits. By putting Nvidia’s technology into medical research and linking it to software that the company controls as well, it creates a huge moat to keep out rival companies. If they create the industry standard, NVDA stock will reap the rewards for years to come.
Picks & Shovels For Biotech
There’s a famous investing allegory that says the best way to make money in a gold rush is by selling picks and shovels. Whether or not the rumors of a big discovery end up being true, mining equipment will make money regardless. Arguably, biotech may be entering a similar place over the next decade.
The industry’s proponents say we’re near an inflection point where all sorts of new cures that were unimaginable up until recently will now become possible. On the other hand, the trend toward single-payer medicine may rein in drug price spending. And those technological breakthroughs may not play out as expected — witness how long the fight against cancer has dragged on now for one example.
Regardless, a lot of money will be spent on research. Take a look at Waters Corporation (NYSE:WAT) for example. WAT stock has quadrupled over the past decade, and the firm is now worth $15 billion. It has done this by selling lab equipment, precision chemistry tools and related software and information services. As long as biotech firms and government entities invest more in medical research, Waters makes more money.
Nvidia may be able to build out a similarly strong franchise with its genetics analysis technologies. Over time, acquisitions such as Parabricks may allow Nvidia to create a platform that bases itself on the company’s cutting-edge processor chips and delivers specialized value-added technology on top of them for the biotech and medical industries.
The Bottom Line on NVDA Stock
I’m not drawn to the Nvidia story today. NVDA stock has run up a straight line from $150 in August to $240 now. There’s been no meaningful correction the whole way up, though perhaps that will change with the coronavirus. In any case, it’s a scary chart to buy into as a trade; the stock could easily drop ten or even twenty percent and that would still be reasonable profit-taking after such a huge move.
Furthermore, the near-term fundamentals don’t support a share price up at $240. The stock is trading at 63x trailing earnings and 34x forward earnings, assuming the company is able to hit analysts’ optimistic forecasts. That’s pretty expensive even if things go well. And if anything comes up, such as a delay in the U.S.-China trade deal, earnings could come up short. So at least at this price, an investment in NVDA stock relies as much on confidence that the company will dominate the 2020s with its cutting-edge technology more than its ability to earn large profits today.
It’s speculative, but Nvidia may be a bet worth making. As the health care initiative shows, when you already have leading technology, you are able to find a surprisingly high number of additional uses for it. As long as the company’s research and development team remains second to none, NVDA stock may be able to continue proving the skeptics wrong. Still, you can almost certainly get a better entry point than this with some patience.
At the time of this writing, Ian Bezek did not hold a position in the aforementioned securities. You can reach him on Twitter at @irbezek.
