Nvidia Corporation (NASDAQ:NVDA) has been one of my favorite companies to cover in 2017, and for obvious reasons. NVDA stock defied all laws of market physics, even up to the present day. Year-to-date, shares are already up firmly in double-digit territory. But with such robust performance following stellar returns, can this rally continue?
Sometimes, good news really is good news.
For Nvidia stock, the markets are simply responding to the company’s innovations in multiple industries. However, Susquehanna’s Christopher Rolland recently warned about NVDA, as well as its rival Advanced Micro Devices, Inc. (NASDAQ:AMD). In Rolland’s view, their GPU sales are originally intended for gaming use, but end up mostly used for cryptocurrency mining.
In particular, Ethereum mining represents a major risk factor for NVDA stock. Throughout 2017, bitcoin prices soared into the stratosphere. When it was priced in the low four digits, bitcoin mining was still a profitable venture for those who had the right (and expensive) equipment.
But at high four digits, and into five-digit territory, bitcoin mining became unprofitable for all but the most capitalized entities. Thus, miners turned to alternative tokens like Ethereum.
This is a problem because mining generally is a winner-takes-all competition. The first to verify data using complex algorithms wins; everybody else racks up a huge electricity bill for their troubles. To increase your odds of victory, you need gobs of power, which equates to more GPUs. No wonder why Nvidia stock had such a phenomenal 2017!
But if you’ve paid attention to cryptocurrency markets, you know that they’re extremely volatile. New investors who thought they could ride a perpetual rally got scared out, cratering the digital markets. Should the same panic ripple throughout the mining community, GPU sales could suffer.
This is bad news for NVDA stock, or is it?
Ethereum Is an Asset for NVDA Stock
Ordinarily, you don’t want a company being overly levered to any one revenue stream. That’s one of the reasons why Amazon.com, Inc. (NASDAQ:AMZN) sometimes acts as if it has a chip on its shoulder. Moreover, critics often point out that the otherwise-outstanding Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) depends too heavily on advertisement revenues.
But is Ethereum mining really a risk factor for NVDA stock? I don’t believe so.
First, cryptocurrencies and the underlining blockchain technology are the future. Now, mainstream critics blast the crypto craze as nothing more than speculation on vapor. But aren’t virtually all innovations met with skepticism and reluctance? I’m sure horse-and-buggy salespeople weren’t too thrilled when Henry Ford invented mass production for automobiles.
While we’re on the subject, I see parallels with NVDA’s driverless technology projects. Many people have obvious concerns about this innovation. Nevertheless, our automotive future is driverless. Avoiding Nvidia stock because of current fears is a bit foolish.
So it is with Ethereum mining. The price fluctuations are insane, no doubt. However, blockchain usage is only increasing. I wouldn’t worry too much about NVDA stock and its leverage toward mining-friendly GPUs because ultimately, it’s a positive development.
Also you should consider that Ethereum mining vastly improves the bitcoin mining concept. As the blockchain pioneer, bitcoin has a few structural problems that are extremely difficult to resolve. One of them is the fact that “early miners own most of the coins that will ever be mined.”
In contrast, the crowd-funded Ethereum is much more decentralized. In its fifth year, miners will own 50% of outstanding coins.
This fact alone incentivizes Ethereum mining, even among newcomers. Furthermore, Ethereum will move to a proof-of-stake system, which should improve electrical-usage efficiency.
Gaming Isn’t a Bad Gig, Either!
Rolland specified that several customers who bought Nvidia GPUs only ended up using it 5% of the time for gaming. The other 95% went to crypto mining.
I’m not exactly sure where he got that statistic from. I also object to this assertion wholeheartedly.
As I’ve said many times before, gaming is big business. We’ve seen stories about video games possibly becoming an Olympic sport. I don’t think that’s going to happen, but look beyond that. If you’re a top gamer, you can make a very handsome living competing in e-tournaments. Yes, crypto mining is hot, but gaming is sustainably lucrative.
The bottom line is don’t overreact to bearish prognostications against NVDA stock. This is a fundamentally sound company working in the most exciting sectors in business, finance and technology. We would need to see profound vulnerabilities before thinking about quitting altogether.
As of this writing, Josh Enomoto is long bitcoin and Ethereum.