Nvidia (NVDA) and Volkswagen (OTCPK:VLKAY) have just announced a promising collaboration in developing a viable AI and deep learning software offering for cars, traffic systems, and other applications. This intensifies the cooperation of the two companies, which revealed their first strategic partnership earlier this year.

The first collaboration framework included integrating Nvidias digital cockpits in the cars of the entire VW group, while also developing autopilot technology with Audi (OTCPK:AUDVF), owned by VW. The first autonomous prototype based on the Audi Q7 model was revealed during CES 2017. The technology was claimed to be built on the basis of Nvidias Drive PX2 processing unit.

This initial agreement was already considered to be very beneficial for both corporations. Thus, Nvidia gained a large customer (the largest automaker in 2016), which among other benefits would allow Nvidia generate consistent and recurring revenue over time from the automotive industry. In turn, VW got a possibility to enhance its vehicles in terms of technology, thus regaining customers attention after the dieselgate scandal hit VWs reputation.

The new cooperation goes beyond just the auto industry. It is stated (the link is in German) the two corporations are going to work together in their own data lab, while also attracting start-up companies to collaborate. Notably, it is stated by Techcrunch the first data lab of VW was established in 2014 to develop AI for such areas as robotic enterprise. The technologies by Nvidia will provide a sound basis for further development.

The words of Volkswagen Chief Information Officer Martin Hofmann are provided by Reuters:

Artificial intelligence is the key to the digital future of the Volkswagen GroupWe want to develop and deploy high-performance AI systems ourselves. This is why we are expanding our expert knowledge required. Cooperation with Nvidia will be a major step in this direction.

Will the collaboration improve Nvidias position in the auto sector?

Nvidias automotive revenue increased 24% YoY in Q1 2017 reaching $140 million. Taking into consideration VW groups revenue amounted to more than $215 billion in 2016, it is clear Nvidia has room to grow in automotive. This is also supported by the prediction of David Pahl from Texas Instruments (TXN), who projects at least 2% of a cars price will be represented by electronics. In the case of VW, 2% from $215 billion lead to $4.3 billion of potential revenue.

In addition, it is interesting to see how Nvidia expands its operations further to Europe, especially to Germany, where the auto sector is one of the key industries. This shows the company bets heavily on the automotive sector as a profit driver in the future, since some players, like AMD (AMD), try to beat Nvidia in the gaming industry.

(Source: Nvidia website)

Volkswagen also actively hires specialists for the research lab.

(Source: jobs.automobilwoche.de)

Conclusion

Overall, the new collaboration is set to intensify the cooperation of the two corporations, which is likely to be beneficial for both VW and Nvidia. Nvidias stock has already grown by more than 200% over last year, and now it trades at a hefty forward P/E multiple of 43.5. However, if the company is able to exploit all the potential it has in the auto industry, this growth can continue.

(Source: Graphiq.com)

As regards VW, the new cooperation will improve its position in the field of AI for cars and also open possibilities to further expand the operations to enterprises, which is also able to bring the stock higher.

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Nvidia To Cooperate With Volkswagen On Artificial Intelligence - Seeking Alpha