What happened
Semiconductor developer NVIDIA (NASDAQ: NVDA) posted strong fourth quarter results last night with an optimistic outlook for the next reporting period. Either way, stocks fell as much as 8.5% on Thursday, because sometimes even a report that surprises analysts is not enough to sustain a bullish stock like NVIDIA’s.
And
In the fourth quarter of 2020, NVIDIA’s top-tier revenue increased 62% year-over-year to $ 5 billion. Adjusted earnings increased 64% to $ 3.10 per diluted share. His average analyst would have been content with earnings close to $ 2.81 per share on sales close to $ 4.82 billion. Stellar results were driven by high demand for NVIDIA data center processors and gaming products.
At the beginning of the report, NVIDIA’s shares gained 112% in 52 weeks. The shares were traded in a free fall inducing 95 times previous earnings and 86 times free cash flow, setting the stage for a significant price cut, despite a strong earnings report. Today, you can purchase NVIDIA shares at somewhat less exorbitant valuation ratios of 93 times adjusted earnings or 71 times free cash flow.
Image source: NVIDIA.
What now
Some investors are also concerned about artificial growth stemming from rising cryptocurrency prices. Specifically, NVIDIA graphics processors are very efficient in mining Ethereum (CRYPT: ETH) tokens and smart contract cryptocurrency saw prices skyrocket 568% last year. If Ethereum miners are buying tons of NVIDIA graphics cards, that leaves fewer units on store shelves for real players. All of this is happening during a shortage of semiconductor manufacturing capacity across the market, further limiting the supply of processors. All of this sounds like good news for NVIDIA, but the idea is that it will also expose the company to significant market risks if Ethereum prices fall again, eliminating demand for token-mining hardware.
NVIDIA’s management acknowledged this concern and took steps to limit the Ethereum mining appeal of its gaming hardware. In addition, CEO Jensen Huang argues that the cryptocurrency mining market is a rather small part of his company’s end-user market. Hyperspecialized application-specific integrated circuits (ASICs) play a much larger role in the crypto mining industry.
“I think this is going to be part of our business. It will not grow much, no matter what, and the reason for that is because when it starts to grow, more ASICs hit the market, what kind of silence,” Huang said on the conference call about fourth quarter earnings. “When the market gets smaller, it is more difficult for ASICs to sustain R&D and, therefore, spot miners, industrial miners come back and then we will create [cryptocurrency mining processors]. And therefore, we expect it to be a small part of our business as we move forward. “
The company cannot keep up with how people end up using the chips it sells, but Huang estimates that about $ 200 million of sales of game products this quarter came from mining enthusiasts. This represents only 8% of a total of US $ 2.5 billion.
All of this to say that NVIDIA’s post-profit correction may have been magnified by the Ethereum mining risk, and this particular threat does not seem quite as threatening. Therefore, you could argue that NVIDIA shares are being sold at a discount today – despite the very high valuation rates.