Vision: MODERN TRADER’s must-own theme for 2018

January 15, 2018 09:00 AM
Eyes Wide Open

A year ago MODERN TRADER tabbed cybersecurity as the investment theme of 2017. Contributors Timothy Summers and Michael Robinson highlighted the reasons and provided a short list of stocks to look at. While every stock mentioned was not a home run, Robinson’s picks of Nvidia (NVDA) and Raytheon (RTN) soared 65% and 40% over the 11 months to follow and the broad sector as represented by the ETFMG Prime Cyber Security ETF (HACK) gained more than 18%. 

And one does not need a spreadsheet to understand the importance of cybersecurity. Traders just need to follow the ongoing investigation into the 2016 Presidential Election hacks and the all-too-often reports of major firms having their security systems—and customer lists—breached. 

While cybersecurity will undoubtedly continue to be a compelling sector for investors, we relied upon Mark Suster and Trip Chowdhry to articulate our must-own investment themes for 2018. 

Investors following Mark Suster’s Both Sides of the Table blog know that he has been evaluating and investing in a number of companies in what he refers to as the “computer vision” space. Suster says vision-activated input/output (I/O) will become a dominant computing trend and a profitable investment theme.

Here is how Suster explains it: 

Put simply — computers handle computation and storage, databases store and retrieve results, and networks handle the movement of this information to different locations. In order for humans to interact with this digital world we need an entry point to “input” (i) information and a mechanism to interpret this information or “output” (o). The major source of input throughout the past 50 plus years has been a keyboard, and then in the past 25 plus years the friend called a mouse was added. The major source of output, of course, has a computer monitor that fortunately takes a lot less desk real estate than it did when I started at my first job in 1991.

In that same year, I read my first technical article about how voice would profoundly change the I/O metaphor of computing arguing that — of course — typing into a computer was slow and not intuitive, and this was many years before carpel tunnel syndrome became widely known. In the late 1990s I began experimenting with voice as an input with a program by Dragon Systems called “NaturallySpeaking” but I was never quite proficient enough to make this work for me.

Of course in recent years, voice as I/O is becoming mainstream. Voice is interesting. But computer vision will be much more profound as our long-term human-computer interface. Put simply, intelligent cameras tied to computers will be able interpret what is happening in the physical world with much more insight than a human using his or her eyes; and computers using a projector will be able to communicate with us as humans way more effectively than us staring into a computer monitor all day.

To some extent, we’ve already started to accept this as a society because the conversation about “autonomous vehicles” has moved mainstream. Most intelligent people accept that computers attached to your car can predict movements that would interfere with your driving (say, a bicycle that is about to zoom in front of you from the right-hand side of the vehicle) and respond more quickly and with fewer errors than a human.

Anybody who knows the field already knows that computer vision is already being used with facial recognition in counter-terrorism, crowd control, combating hooliganism and so forth. But computer vision will enhance the daily experiences of our lives and provide us with significantly more data about the world than we have ever had.

I/O from voice to vision

For actionable advice on investing in I/O theme in 2018, we turn to Trip Chowdhury of Global Equities Research. Trip is one of the few analysts to follow and advocate for “voice first,” and more recently, “vision first” investments. 

Here is how Chowdhry sees it: 

We are beginning to see some shifts in the industry as general purpose personal electronic devices like iPhones are giving way to specialized devices. Voice first devices, like Amazon Alexa, Google Home; and vision first devices like Netgear’s (NTGR) Arlo.

Apple (AAPL) is struggling with Voice First devices and we believe Apple’s HomePod delayed launch will be too late, too weak. On the other hand, Netgear’s Arlo (vision first device) has been a home run.

Deep Machine Learning (DML) is creating the emergence of voice first and vision first devices, both of which are powered by DML. Consequently, we see an extremely strong business model for both vision first (NTGR Arlo) and for voice first (AMZN Alexa, GOOGL Home) devices.           

Voice first devices from AMZN (Alexa Echo) and GOOGL (Home) had very strong sales on Black Friday as both were approximately 20x their average daily sales.

NTGR’s Arlo vision first device hit a home run as Arlo likely outsold the combined sales of Google’s Nest + Ring + Samsung by a multiple of 30 to 40 times. 

The I/O Industry is moving beyond iPhone towards voice first devices, and vision first devices

Voice First Device:  Apple has zero chance to win against AMZN Alexa and Google Home in the Voice First Devices.  Apple is too late and too weak. 

Vision First Device:  Apple has zero chance to win against NTGR Arlo. Apple has not even started on Vision First devices yet.

Trips Pick: Netgear NTGR 

     Chowdhry believes that Netgear’s (NTGR) Arlo home security camera could be a $15.3 billion business on its own, and 10x the current market cap of Netgear.

NTGR’s $109 price target (Overweight) is based on a 6x sales multiple of the NTGR’s Arlo business unit revenues ($352 million), which has grown >100%
     + 1x Sales of NTGR’s remaining business ($1,039 million) 
     + Net cash on NTGR’s balance sheet ($305 million).   

For a technician’s view, see “NTGR: Gearing for breakout.”


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