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When Apple launched the iPhone 10 years ago the stock was at $22 and Wall Street considered it overvalued. Today it trades at $153, showing that it’s possible create wealth in the stock market and that Wall Street is not always right. If you are looking for stocks like Apple for the next 10 years, take a close look at Tesla, Nvidia and Alibaba.
In February, with Tesla trading at $280, Goldman Sachs downgraded it to a sell causing a quick downdraft which accelerated after UBS issued a sell recommendation soon after. A week later, Gorden Lam told us he was buying on the pullback. Today, the stock is at $338.
Goldman and UBS think Tesla is overvalued because they compare it to other car companies. For example, Ford had sales of $151 billion in 2016 and has a market cap of $47 billion. Tesla’s 2016 sales were $4 billion but its market cap is $56 billion.
Sound compelling? Ten years ago, Wall Street used to compare Apple to Microsoft to make the case that Apple was overvalued at $22. Just as Microsoft was not a good comp for Apple then, Ford is not a good comp for Tesla now. Here’s why.
As Gorden said in February, electric cars are only Tesla’s first initiative. The products that Tesla will create in the next 10 years will “change the way we view renewable energy, transportation, and commerce.”
In time, Wall Street will see that Tesla is much more than a car company, just as Apple is now seen as much more than a computer company.
In July of 2015, Nate Pile was buying Nvidia for less than $23. Mike Durzan bought it in May of 2012 when it was under $13. Wayne Himelsein started buying it in October of 2007 at $36. Today its at $174.
It’s rare to find a stock that 3 top managers with different investment styles can agree on. As recently as June, when negative opinions published by Citron, Instinet, and Pacific Crest caused a series of large one-day drops, Mike Durzan told us why he was buying on the pullback in the $100 to $110 range to make it his single largest position.
So what is the attraction?
Nvidia is beating Intel in the competition to provide the processing power that future applications like artificial intelligence, virtual reality, and self-driving cars will rely on. Intel is still the leader for central processing units (CPUs). But increasingly the processing for advanced applications is being handled by graphics processing units (GPUs).
While the market for CPUs is still growing, it is a mature industry. The market for GPUs, on the other hand has grown quickly as manufacturers have started designing them into their next generation products.
If you have not heard of a GPU, it is because there are no break-out products in artificial reality, virtual reality, or self-driving cars — yet. But when it happens, sales of Nvidia GPUs will accelerate, and the public will notice.
When Apple launched the iPhone, Wall Street originally compared it to Nokia’s smart phones. At the time, Wall Street did not expect the iPhone to displace Nokia. In the same way, ten years from now, Nvidia GPUs could displace Intel’s CPUs at the heart of products that still seem like science fiction today.
Like Apple, Amazon has created tremendous wealth for its shareholders. But Amazon is trading at a PE of 245 while Alibaba’s PE is 62. The disparity of their valuations is easy to miss if you are not aware of the similarity of their business models.
If you like Amazon’s business, but never bought the stock because of its rich valuation, Alibaba is a good alternative.
Amazon is to the U.S. economy, what Alibaba is to China’s economy. Over the next 10 years, China’s economy is expected to become larger than the U.S. economy.
In short, Alibaba has a larger upside and a much lower valuation than Amazon.
Use Time To Your Advantage
If your investment horizon is less than 1 year, Wall Street will always have the advantage. As we’ve seen time and time again, even when Wall Street is wrong, their opinions can affect prices adversely in the short-term.
However, when investing over timeframes longer than 12 months, Wall Street’s advantage shrinks considerably and some individuals even have an advantage over them. You can view the track records of the managers I’ve interviewed by clicking on their names above. For information about investing with them, click here.
Disclosure: Marketocracy, its affiliates, clients, and I may have material financial interests in the stocks mentioned and may hold or trade them contrary to these opinions when, in our view, market conditions change.
I believe people should have to prove themselves before they can manage other people’s money and the best evidence of investment skill is a track record. For more information contact me.