THE PURE-PLAY REPORT 1

IGITALORTUNES

by LOUIS BASENESE and GREG MILLER

THE DRIVERLESS CAR BOOMHOW TO CREATE ENOUGH WEALTH TO LAST THREE GENERATIONS

THE PURE-PLAY REPORT 2

THE HANDS-DOWN BEST PURE-PLAY ON TWO LIFE-CHANGING AUTO TECHNOLOGY TRENDS

In 2003, Apple’s (AAPL) Head Designer, Jony Ive, shared the driving force behind the company’s innovation process.

“So much of what we try to do is get to a point where the solution seems inevitable,” he said.

In other words, Apple – which now boasts the largest market cap in the world – endlessly tests new designs until it arrives at a product that leaves the user feeling like it’s the only possible solution.

In turn, the product sells itself. To the tune of hundreds of millions of units.

Take the iPod, for example, which launched in 2001. Before the device hit the market, we went to a store, bought a CD, and then burned our favorite tracks onto a mix CD. But the iPod revolutionized the process. We could simply download songs and create digital mixes.

What an inevitable solution!

It’s precisely this kind of tech inevitability that we need to embrace in our investments.

By that, I mean we should invest early in technologies that are inevitable solutions to existing problems.

Easier said than done, of course. But we’re going to do just that here…

THE NEXT FRONTIER OF MOBILE CONNECTIVITY

Outside of the workplace and home, where do we spend the most time?

In our cars, of course.

Based on the latest Harris Poll, the average person spends 6.5 hours per week in a car. Previous studies show that some people spend upwards of 15 hours per week in the car. That’s 14% of their waking time!

Imagine how much more you could get done with an extra 15 hours per week.

Technology has an inevitable solution for us to “reclaim” this time – and increase our productivity.

Much like smartphones revolutionized our way of life, allowing us to do virtually everything on the go, automakers and tech companies are teaming up to make our cars an extension of the mobile experience. How?

With a concept called the “connected car.”

THE PURE-PLAY REPORT 3

As the term suggests, it essentially means turning your car into a mobile computer and connecting it to the internet. By doing so, services like streaming music, real-time traffic and weather updates, and even driver-assistance are quickly becoming a reality.

And as for investing early… well, we’ve got that covered, too.

The connected car market is still in its infancy, as less than 10 million cars currently have an active internet connection.

But it’s set to take off over the next five years.

Technology research firm, Gartner, predicts that one in five vehicles on the road today – about 250 million – will have a wireless network connection by 2020.

And in terms of new car shipments, Business Intelligence estimates that 75% of the 92 million new cars shipped globally in 2020 will come with an internet connection. Some industry insiders even believe that percentage will be as high as 90%.

This connectivity will send revenue into the stratosphere, too, with connected car sales topping $2 trillion in 2020.

This trend is exciting for both consumers and automakers alike…

You see, the average car today contains up to one million lines of software code. But by having an internet connection, a car could be “updated” automatically after it leaves the lot, saving car companies millions.

Consider that in 2014 alone, over 50 million cars were recalled in the United States for small problems, including software patches, according to the Detroit Free Press.

TURNING CARS INTO COMPUTERSGLOBAL CONNECTED CAR SHIPMENTS SET TO SOAR

2013 2014 2015(est)

2016(est)

2017(est)

2018(est)

2019(est)

2020(est)

Source: Scotiabank, BI Intelligence Estimates

Global Cars Shipped Shipped With Connectivity

69M 72M

7M

75M

10M

78M

15M

81M

22M

84M

32M

88M

47M

92M

69M

7M

THE PURE-PLAY REPORT 4

The point is, connected cars are inevitable. And the investment opportunity is simply too big to pass up.But that’s not the only inevitability we’re tracking...

THE FUTURE IS AUTONOMOUS

The build-out of connected cars is also going to enable a far more revolutionary change to our driving experience.

I’m talking about autonomous, self-driving cars.

Don’t believe me? Take it from the guys at the top…

A new IBM survey of auto executives reveals that self-driving cars aren’t just set to be a fad... they’re likely to become commonplace in the next decade.

The rollout will be gradual, as technologies to enable fully autonomous vehicles are developed. But estimates from Frost & Sullivan show that a meaningful number of self-driving cars will hit the market by 2020.

Still, we’re only talking about 180,000 self-driving cars being shipped that year, which is less than 1% of the total market.

Now, if self-driving cars scare you, consider that we’re already seeing more cars equipped with semi-autonomous driving capabilities. Heck, you may even use a few of them yourself.

We’re talking about things like automatic braking, collision avoidance, lane departure warning, parking assistance, and adaptive headlights. While monitoring and input are still required from a driver, these technologies are clearly stepping-stones to an autonomous future.

THE FUTURE OF DRIVING: NO DRIVERS REQUIREDESTIMATED NUMBER OF AUTONOMOUS CAR SHIPMENTS

200,000

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

-

2012 2013 2014 2015(est)

2016(est)

2017(est)

2018(est)

2019(est)

2020(est)

Source: Frost & Sullivan 2014, BI Intelligence Estimates

THE PURE-PLAY REPORT 5

And much like connected cars, this trend isn’t simply about consumer convenience. Above all else, it’s about safety.

According to the U.S. Insurance Institute for Highway Safety (IIHS), more than 90% of car accidents are due to human error. And as many as 1.9 million crashes – including one in every three fatal crashes – could be avoided each year with the latest technologies.

So how are we going to position our portfolios to best profit from the connected car and driverless car inevitabilities?

THE TIPPING POINT IS NOW!

Later in this report, Senior Technology Analyst, Greg Miller, will share a blue-chip opportunity to capitalize on the latest auto innovations.

But I want to focus on a more-speculative, yet equally compelling, opportunity – Mobileye N.V. (MBLY).

Founded in 1999 and based in Israel, the company is a leading developer of camera-based advanced driver assistance systems (ADAS).

The company’s proprietary software algorithms and EyeQ chips perform detailed interpretations of the visual field in order to anticipate possible collisions with other cars, pedestrians, cyclists, animals, debris, and other obstacles.

In layman’s terms, Mobileye embeds chips and software into a camera system that monitors road conditions, thereby providing cars with self-driving and auto-safety features.

To date, the company has installed its products in approximately 4.5 million vehicles worldwide. So this is hardly a science experiment.

It’s a powerful technology being deployed on a large scale.

At the end of 2014, Mobileye’s technology was already available in 160 car models from 18 original equipment manufacturers (OEMs).

Digging into the company’s results makes it evident that a tipping point in deployment is upon us.

For example, it took the company five years to ship the first one million EyeQ chips. But it sold nearly double that amount (1.9 million) over the first nine months of 2014.

THE PURE-PLAY REPORT 6

TIMING IS EVERYTHING

Mobileye hit the stock market in August 2014 in a highly publicized IPO. Shares priced above the expected range at $25 and soared to a high of $60.28 in less than 60 days.

Unsurprisingly, investors got carried away with the IPO hype. As a result, shares pulled back to the first day opening price of $36. But the market is quickly catching on to the opportunity here,

And rightfully so, as both the company’s fundamentals and prospects, are improving all the time.

Consider that Mobileye’s technology is advancing rapidly. Take a look at the following facts...

¢ By the end of 2016, Mobileye’s products will be in 244 car models from 21 OEMs.

¢ In 2016, the company plans to launch products with multi-focal cameras. These next-generation products will include three chips instead of one, thereby significantly boosting sales volumes.

¢ The company already boasts an 80% share of the ADAS market. But it’s not getting complacent. It keeps innovating to deliver better performance and maintain its leadership position. Case in point: Mobileye’s EyeQ2 chip was approximately six times faster than the original one. EyeQ3, launched in the fourth quarter of 2014, is approximately eight times faster than EyeQ2. And the company is working on EyeQ4, set to launch in 2018.

GET READY FOR “HYPER GROWTH”

An analyst at RBC Capital Markets sums up Mobileye’s opportunity best, declaring that the company will “experience hyper growth through the end of the decade.”

Meanwhile, Morgan Stanley (MS) conducted research on North American auto suppliers – and rates Mobileye as the best pick. The firm slapped a long-term price target of $150 on the stock, too. That’s a 257% surge from current levels around $42.

After conducting numerous hours of research myself on this market, I’m convinced that there’s no other pure-play on autonomous driving that can match this powerful trifecta from Mobileye…

The company boasts...

¢ A 50% compound annual growth rate for sales.

THE PURE-PLAY REPORT 7

THE TECH GIANT QUIETLY MAKING A BIG SPLASH IN CAR CONNECTIVITY

When you think of NVIDIA Corp. (NVDA), you likely associate the company with personal computers. Specifically, it makes the graphics cards that go inside PCs, and NVIDIA is the leader in this field.

It’s a great business right now, too. The PC is taking gaming market share back from the Xbox and PlayStation. And NVIDIA is both a major cause and beneficiary of this trend, since its graphics cards make it possible for game designers to make ever-more impressive games.

Indeed, these cards make up much of the company’s revenue, with this area of NVIDIA’s business growing at 12% per year.

But there’s so much more to the company than that.

It also makes graphics chips and cards for higher-end applications, like industrial design workstations and special effects for movies. And it powers the graphics in an increasing number of the impressive tablets that are displacing laptops.

However, aside from this bread-and-butter business, NVIDIA is also targeting the auto industry as one of its most lucrative future markets.

THE REAL BRAINS BEHIND TESLA’S GENIUS

If you think Elon Musk is the genius behind Tesla’s (TSLA) relentless surge into the auto industry… well, you’re only half right.

NVIDIA is the real brains of the operation. All the power balancing, battery management, and smart braking in Tesla cars run through a chipset that NVIDIA designed.

With the company pioneering such intelligent, cutting-edge technology, it stands

¢ 75%-plus gross margins.

¢ And 16 years of ADAS research and development.

The next growth catalyst will come during the week of February 8-12, when Mobileye is expected to confirm even greater progress of its technology during the company’s quarterly earnings announcement.

Action to Take: Buy Mobileye N.V. (MBLY) at market. Use a 25% trailing stop to protect your principal and profits. DF LOUIS BASENESE

THE PURE-PLAY REPORT 8

to reason that it would bulldoze its way into the fast-growing connected and driverless car trends.

And that’s exactly what it’s doing.

At the 2015 Consumer Electronics Show, the firm unveiled its next-generation chip – the Tegra X1 – along with its accompanying products, the NVIDIA Drive PX and Drive CX.

They’re crucial in advancing the development of “new age” cars.

For example, the PX has inputs for 12 cameras and is a major step in designing a fully autonomous car.

The CX product focuses more on the “infotainment” side (i.e., merging information and entertainment while in the car). After all, if the car is driving itself, humans will need something else to do!

NVIDIA also showed off a new combination chip at CES. The company uses its own chips, along with one from Mobileye N.V. (MBLY) – the other company we’ve highlighted in this issue. The product will be used in a future Audi design.

AN INCREDIBLE GROWTH CURVE

At the moment, the auto industry is a fairly small part of NVIDIA’s business. So small, in fact, that for reporting purposes, the company lumps auto-related revenue in with the tablet business under the category “mobile.”

In NVIDIA’s fiscal 2015, auto revenue totaled $100 million – just 2% of the company’s overall total.

But don’t expect that to last long. The growth trajectory here is incredible.

Auto revenue blasted 42% higher in fiscal 2015, and NVIDIA expects that pace to continue or even accelerate, as the driverless and connected car trends gain even more momentum.

It’s no secret that many major automakers are hammering away on driverless car designs and in-car connectivity.

In fact, NVIDIA already has more than $2-billion worth of business booked over the next few years, based on the cars that are set to incorporate its technology – including Audi, Volkswagen, BMW, Tesla, Rolls-Royce, and Aston Martin.

And here’s the best part…

NVIDIA ALREADY HAS THE TECHNOLOGY FOR CONNECTED

THE PURE-PLAY REPORT 9

CARS

For its auto products, NVIDIA leverages the technology that it’s already developed for other markets.

For example, its flagship auto infotainment product uses the same architecture that’s made the company so successful in the PC graphics business. Not only does this reduce the amount of R&D necessary to create products, it’s also crucial in another way…

What NVIDIA does best is take an enormous amount of data, process it, and turn it into full-motion video. Autonomous cars require the same skillset in reverse. The challenge is to take an enormous amount of visual information, process it, and turn it into data that the car can use to make decisions. Like when to change lanes, whether a pothole should be driven over or around, whether that deer will finish crossing the road before the car gets to its location, what signs say, and so on.

Granted, programming a self-driving car is far more complex than simply running NVIDIA’s data-processing system backwards! But the company’s extensive experience in translating between digital data and visual information gives it a vital advantage over its competitors as the market develops.

In short, NVIDIA allows for us to get into the self-driving and connected car trend with relatively little risk. The company already boasts several profitable and growing business lines (as evidenced by its healthy profit margin), strong cash flow, $4.75 billion in the bank, and a 1.4% dividend. It’s also buying back stock, even after spending on new markets like autos.

Action to Take: Buy NVIDIA Corp. (NVDA) at market. Use a 25% trailing stop to protect your principal and profits.

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DF GREG MILLER