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Key Technology Trends on Full Display at CES 2017

We think Intel, Qualcomm, and Nvidia are poised to benefit.

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We came away from CES 2017 with greater confidence in the prospects for key technology players such as  Intel (INTC),  Qualcomm (QCOM), and  Nvidia (NVDA). Pre-eminent trends--including 5G, artificial intelligence/deep learning, autonomous vehicles, and virtual reality—that have been exhaustively discussed in theory in recent years were on full display across the premier electronics trade show. We believe investors should not view these burgeoning trends in isolation, but rather as an interconnected tapestry intricately woven with key elements from a host of firms. Given Intel’s expertise in high-powered computing, Qualcomm’s connectivity and mobile chip leadership, and Nvidia’s versatile graphics processing units, we expect all three to benefit immensely from these opportunities. We are maintaining our fair value estimates and moat ratings for these companies. We continue to view the shares of Qualcomm as having an adequate margin of safety, while Nvidia and Intel appear overvalued, albeit to varying degrees.

At a high level, new applications such as autonomous driving have a long list of requirements that can vary from high-powered and energy-efficient chips to overarching regulatory and infrastructure upheavals. As automated vehicles will generate and take in enormous amounts of data to navigate and react instantaneously to abrupt deviations, a futuristic network (5G) that can deliver faster speeds, ultra-low latency, vehicle-to-vehicle connectivity, and reliability is of the utmost importance. Meanwhile, the components in the vehicle itself also must be fit for the task, ranging from basic sensors that identify surroundings to advanced processors capable of almost instantaneously crunching mission-critical data to safely drive a vehicle without human intervention. The data center will also play a pivotal role in this ambitious pursuit. The computational power required to create, simulate, and train self-driving algorithms can only be found in servers accessed by vehicles via the cloud. We believe a successful autonomous vehicle will be the product of an ecosystem of partnerships among an army of firms.

Noteworthy announcements from Intel at CES 2017 included a new 5G modem, an automated driving platform called Intel GO, and the expectation of having 40 autonomous test vehicles on the road by the end of 2017 via a partnership with BMW and Mobileye (MBLY). Intel also agreed to purchase a 15% ownership stake in Here, a global provider of digital maps and location-based services. Strategically, we think this is a prudent move, as location data is a critical component in achieving fully autonomous vehicles. The firm also held a virtual reality news conference, with each participant given an Oculus Rift virtual reality headset powered by a seventh-generation Intel core processor-based PC. We came away impressed by the various VR examples, including a look at a live NCAA basketball game from a courtside vantage point via Voke VR and a live industrial inspection of a solar power plant via a drone. Cumulatively, these products and endeavors show how Intel continues to distance itself from the traditional PC market. Our wide economic moat rating stems from the firm’s scale and ability to invest heavily in developing and making processors, regardless of application. By continuing to diversify, Intel is positioning itself to be instrumental in the success of whatever growth vector proliferates the most, in our view.

Qualcomm also provided a host of updates on its contributions to the aforementioned trends. The firm noted a collaboration with Ericsson (ERIC) and AT&T (T) on radio trials for the second half of 2017, intended to accelerate the deployment of 5G. Qualcomm also announced its inclusion in a consortium of telecom and automotive companies to carry out trials for vehicle-to-everything communication. This primarily focuses on vehicle-to-vehicle, vehicle-to-infrastructure, vehicle-to-pedestrian, and vehicle-to-network communications. These developments will form the foundation for 5G and autonomous vehicles, and we expect Qualcomm to leverage these roles into meaningful licensing revenue related to 5G connected devices and chip sales primarily from modem processors. The firm’s incremental progress into cars was bolstered by the integration of Qualcomm chipsets into next-generation Volkswagen vehicles, a new in-vehicle infotainment system being developed with Panasonic, and a new modem tailored to connected cars. We think Qualcomm is appropriately shifting its focus toward more promising avenues of growth as it looks to mitigate its reliance on the smartphone space. We expect the impending acquisition of NXP Semiconductors will augment this undertaking. We reiterate our narrow moat rating for Qualcomm, stemming from intangible assets related to the firm’s CDMA technology patents.

Qualcomm continues to innovate on the mobile chip side, introducing its latest Snapdragon processor, the 835, built on Samsung’s 10-nanometer process technology. It is speculated the chip will be featured in the Samsung Galaxy S8. The 835 was designed to support a bevy of devices including virtual reality/augmented reality head-mounted displays, tablets, and mobile PCs. We note process specifications indicate the central processing unit in the 835 is a semicustom architecture, in contrast to the fully custom predecessor 820. When we asked why this was the case, Qualcomm representatives said the strategy was consistent with efforts to cut back research and development spending in mobile chip design, while redeploying the investment capital in other areas such as the Centriq 2400 server chip, which is currently sampling at customers. While we view this move as prudent for Qualcomm’s overall business, we think it also provides second-tier mobile chip competitors such as MediaTek a chance to catch up to Qualcomm.

Nvidia’s presence at CES 2017 was balanced between its leading gaming GPUs as well as its well-publicized products tailored to autonomous driving. Nvidia unveiled the GeForce NOW service, which delivers high-performance PC gaming via the cloud using a pay-by-play model. We think this service was inevitable, but we are concerned it will cannibalize Nvidia’s high-end GPU sales, as the GeForce NOW can be used on computers without Nvidia GPUs. Nvidia also reignited its decade-long partnership with Audi, announcing a goal to put self-driving cars on the road by 2020. The graphics leader noted two developments related to mapping for cars: an extension of its existing collaboration with Here and a new partnership with Zenrin, Japan’s leading mapping company. The firm’s Drive PX 2 platform for autonomous driving has gained significant traction in the development of self-driving vehicles, but we expect competition to increase materially. Between Qualcomm-NXP and Intel-Mobileye, we think Nvidia will find it difficult to maintain its current leadership position. Our no-moat rating stems from the fact that gaming GPUs dominate total revenue for the firm and our view that the longevity of Nvidia’s competitive edge in the space is far from guaranteed. With the shares priced as if Nvidia will dominate the self-driving market in the automotive industry, we continue to view the firm as considerably overvalued.

Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.