There has been some worry recently about how Nvidia Corporation (NASDAQ:NVDA) stock holds up in the event that bitcoin prices continue to fall. After all, cryptocurrency mining did provide Nvidia stock with healthy tailwinds in fiscal 2018. It would be a lie to say that the 130% surge in Nvidia stock price over the past year had nothing to do with bitcoin or cryptocurrencies.
Therefore, as bitcoin prices have collapsed to a point where it is no longer profitable to mine the cryptocurrency, Nvidia has reasonably shown signs of weakness. With bitcoin prices this low, many analysts project the cryptocurrency mining tailwind to slow meaningfully in fiscal 2019.
Considering bitcoin prices are at break-even, I wouldn’t be surprised to see that tailwind all together stop. But does Nvidia stock really need high bitcoin prices and ton of cryptocurrency hype to head higher?
No. Cryptocurrency is but one tiny piece in the secular growth narrative at NVDA. Even an entire collapse in that market shouldn’t cause a huge drop in Nvidia stock.
Here’s a deeper look.
Nvidia Is Strong Without Cryptos
Analysts are calling for NVDA’s cryptocurrency tailwind to slow meaningfully in fiscal 2019. That seems too nice to me. I wouldn’t be surprised to see this tailwind all together disappear over the next several quarters.
And that really isn’t that big of a deal.
Analysts estimate that cryptocurrency revenues last quarter were anywhere from $180 million to $230 million. That would mean they represented roughly 6% to 8% of total revenues. That isn’t big, but it is not small either. So it is easy to see why some investors are concerned.
But on a going forward basis, the NVDA growth narrative is less about cryptos and more about datacenters, AI, automation, VR, AR, and gaming.
The data center business is by far and away the most exciting piece of the NVDA growth narrative. This business grew at a triple digit rate last quarter and last year, and accounted for more than a fifth of revenues. So it is a bigger piece of the pie than cryptos.
It also has a far healthier long-term outlook. There is an explosion in the amount of data in the world. Just think about the number of smart devices popping up everywhere and the mainstream emergence of the Internet-of-Things. Each one of those devices produces a ton of data, and companies are starting to leverage that data to make decisions. Therefore, that data is becoming increasingly valuable.
Valuable stuff needs to be stored and secured in a trusted location. That is why hyperscale data centers have emerged as big growth players. This trend won’t reverse any time soon. If anything, it is accelerating as we enter more deeply into a data-driven world.
NVDA provides components which these hyperscale data centers operate on. And they are very good at it. Essentially every big player in the hyperscale data center world is a customer of NVDA.
This includes Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), IBM (NYSE:IBM), Baidu Inc (ADR) (NASDAQ:BIDU), and Alibaba Group Holding Ltd (NYSE:BABA).
Beyond the data center business, NVDA also has several other hyper growth businesses to offset cryptocurrency weakness. The gaming business is huge (60% of revenues) and growing nicely (up 29% last quarter). This big growth should continue as the video game revolution accelerates, and AR/VR, high-graphic, and AI technologies are infused into games.
There is also the professional visualization business (9% of revenues and growing at a 13% pace). This business is essentially a pure play on the emergence of AI and VR enhanced technologies. Then there is the automotive business (5% of revenues and up 3% last quarter), which will explode higher whenever there is a major breakthrough in automated driving and that technology goes mainstream.
All together, NVDA has a ton of big growth drivers aside from the cryptocurrency market. In fact, roughly 94% of NVDA’s business is supported by secular growth drivers. The other 6% is the volatile cryptocurrency stuff which investors can afford to live without.
Bottom Line on NVDA Stock
There will be near-term weakness in the stock. After all, Nvidia stock trades at a very rich 39-times forward earnings multiple. Therefore, any hiccups in the growth narrative will result in material weakness in the stock.
But that weakness is a long-term buying opportunity. This is a big growth company with exposure to all the markets that will be important in tomorrow’s world. Competition is stiff and will only get stiffer, but NVDA remains the leader. So long as NVDA maintains this leadership position, the stock should be a long-term winner.
As of this writing, Luke Lango was long NVDA, AMZN, GOOG, BIDU, and BABA.