“Bitcoin is to blame” could be a new catchphrase if the technology sector continues to sink.
Semiconductor manufacturer
Nvidia
(ticker: NVDA) fell 8.1% to $ 532.94 in recent trading amid a broader route in the high-tech market
Nasdaq Compound
index. The chip stock stands out because the company released a strong earnings report on Wednesday, including an increase in products related to Bitcoin and other cryptocurrencies.
Payments app
Square
(SQ), in turn, also continued its fall, down 4.3%, to $ 227.09. The company’s relatively strong earnings report on Tuesday included Bitcoin investments and operating earnings, and the company said it plans to “double” the digital currency. This may be weighing on stocks, which have dropped nearly 20% in the last few sessions, as Bitcoin prices plummeted.
The technology is under pressure for other reasons: high assessments have made the sector vulnerable to weaknesses in corporate forecasts. The increase in bond yields poses a threat by putting pressure on the present value of future cash flows. Big Tech is also a busy trade that may be losing preference as investors seek more cyclical exposure or sectors with lower valuations.
But trading patterns at Nvidia, Square,
Tesla
(TSLA), and other actions may also be a sign of Bitcoin’s growing influence. Companies are investing capital directly in Bitcoin and related products and services, expanding exposure at a time when prices soared more than 350% last year. Despite its recent decline, Bitcoin is still up 67% this year.
Encryption is certainly gaining momentum.
MasterCard
(MA) said this month it would start supporting cryptocurrencies directly on its network, noting that many consumers are already using cards to buy crypto assets. But it would still be an exaggeration to turn Bitcoin into a viable currency for daily purchases, a
MasterCard
executive observed at a conference on Thursday.
“Bitcoin does not behave like a payment instrument,” said Executive Vice President of Mastercard, Ann Cairns, according to a report by MarketWatch. “It is very volatile and takes a long time to make transactions.”
Whether it becomes an asset class or a payment instrument, Bitcoin’s rise (and potential fall) is tearing corners of technology, banks and other sectors.
Nvidia, for example, issued an impressive earnings report, as Barron’s noticed. But it is also becoming more of a crypto game.
The company said that encryption may have had a positive impact of $ 100 million to $ 300 million in the quarter. The company is launching a new line of cryptocurrency mining processors, or CMPs, for professional cryptographic mining.
“Cryptocurrencies have recently begun to be accepted by companies and financial institutions and are increasingly showing signs of staying power,” Nvidia told investors. Its new line of CMPs will give the company more visibility into the contribution of cryptography to revenue, the company added.
Some analysts question the sustainability of the trend. Piper Sandler’s Harsh Kumar reiterated an overweight rating on stocks, for example, but warned of Nvidia’s increasing exposure to cryptography.
“With cryptocurrency entering the scene again, the line between cryptography and the positive side of basic games is blurred,” he writes. “We feel that investors can question the sustainability of these trends, mainly due to cryptocurrency problems in the past.”
The Payments app Square, as noted above, is also directly in the Bitcoin debate. While core business trends look healthy, investors may be concerned that Square is expanding into cryptography as prices rise. The company bought $ 170 million of Bitcoin in the quarter, in addition to the $ 50 million previously acquired, and is marketing its Cash App as a mechanism to buy, store and eventually make transactions with the cryptocurrency.
Wall Street has differing views on this idea. Competitors like
PayPal Holdings
(PYPL) are also investing in Bitcoin, along with other “neo-bank” competitors, notes JMP analyst David Scharf. This raises questions about the Cash App’s long-term “rigidity” and whether its growth can be sustained.
In fact, the Cash App now accounts for about half of Square’s gross profit, and the company is relying on Bitcoin to supply demand. This is to make Square’s shares a bit of a Bitcoin derivative; the shares have been increasingly correlated to the price of Bitcoin in the past year, and the relationship can only be getting closer.
Square’s shares may also not be entirely responsible for the volatility of Bitcoin, which has had several boom and bust cycles. With around 100 Ebitda estimated in 2022 (earnings before interest, taxes, depreciation and amortization), the shares appear to be fully valued, according to Scharf, who maintained the Market Perform rating.
Jeff Cantwell of Guggenheim took the opposite side of that debate. He raised Square’s shares to Buy on Thursday, partly due to an optimistic outlook for Bitcoin. “We think Bitcoin is on a higher long-term trajectory,” he writes, adding that it should lead to an increase in the use of Cash App and other metrics.
He doesn’t see Bitcoin becoming a currency used for conventional purchases anytime soon. But that is beside the point, he notes, as Bitcoin is turning into “digital gold” – a store of value and an asset class. There are 50 million digital Bitcoin wallets worldwide, a large and growing user base, he notes. Square is doing its part to make Bitcoin popular.
Cantwell sees Square’s shares reaching $ 288. Bitcoin may have to do its part for the stock to get there too.
Write to Daren Fonda at [email protected]