With the rise of emerging technologies such as the cloud and the digitalization of everything, tech firms place a premium on adaptability. In that sense, you really have to like semiconductor firm Nvidia (NASDAQ:NVDA). Perhaps most known to the masses for its video-game specific graphics processors, NVDA stock touches multiple other sectors.
Unfortunately for stakeholders, that didn’t save the company from last year’s horrific implosion. Up until late September, the tech firm’s equity was on pace for another remarkable performance. But the broader market collapse also took down the Nvidia stock price. Even though the hemorrhaging has stopped (at least for now), shares are back to where they were in the fall of 2017.
Two major headwinds have weighed on Nvidia stock over the past 10 months. First, the U.S.-China trade war imposed a disproportionate effect on the semiconductor firm. As our own Tezcan Gecgil noted, a quarter of revenue comes from China.
This is problematic for the obvious reason. However, what really hurts the case for NVDA and the Nvidia stock price is the apparent lack of progress. I’m not a political analyst, but it doesn’t take an expert in this field to recognize the bitterness involved.
The other major headwind has been the cryptocurrency sector. With blockchain-based reward tokens falling into the abyss, crypto mining became unprofitable. Therefore, miners panicked out of this market, selling their high-end processors for pennies on the dollar.
And this had a double negative impact on NVDA. First, the company lost a significant source of revenue. Second, inventory skyrocketed.
But at least one of these headwinds may finally fade in time to “save” Nvidia stock.
Crypto Provides a Lifeline to NVDA
Allow me to walk back some hyperbole: no one revenue segment can save NVDA. However, I firmly believe that the resurgent cryptocurrencies rally is for real. And if that’s the case, the Nvidia stock price has serious upside ahead.
Let’s first establish why the virtual currency phenomenon is so vital to the tech firm. Management has been fairly muted about the blockchain’s impact to the company overall. However, according to RBC Capital Markets analyst Mitch Steves, Nvidia generated $2.75 billion in crypto-related sales between April 2017 and July 2018.
With some rough math, that breaks down to about $2 billion over a one-year period. And last year, the company rang up $11.7 billion in revenue. Thus, cryptocurrencies would have roughly accounted for 17% of that sales haul, using Steves’ allegedly more accurate numbers.
Secondly, NVDA has consistently made a name for itself with the most high-end mining-specific processors. Sure, Advanced Micro Devices (NASDAQ:AMD) has also turned up the heat in this area before the crypto collapse of late 2017/early 2018. However, Nvidia offers an array of processors across different price points.
In my view, Nvidia processors have the reputation of being the best for crypto mining. As such, once virtual currencies take off again, miners will gravitate toward NVDA products. Ultimately, mining is an extremely competitive arena.
In this case, he (or she) who has the fastest processor makes the rules.
And believe me, this crypto rally is for real. I say this because the general public got a taste of this digital market’s true potential. Now, steadily rising prices will encourage newcomers to jump on board.
Call it the fear of missing out, or simple human psychology: either way, the blockchain bulls are coming, and that bodes well for the Nvidia stock price.
What About China?
If I sold you on the cryptocurrency lift for Nvidia, that’s only half the battle. Naturally, skeptics will ask about China and its foreboding cloud on the company.
Admittedly, I don’t have the greatest answer for that question. This is an ugly conflict that touches on deep-seated rivalries. Since President Donald Trump isn’t exactly known for his delicate approach, I’m not sure how this will play out.
That said, I think it’s important to realize that the China headwind isn’t exclusive on NVDA. And while AMD has mitigated its exposure to China directly, it still suffers from residual damage. For instance, data servers have wrestled with excess inventory they purchased before the trade war.
This is where Nvidia’s financial stability and greater fiscal depth comes into play. Simply put, they have the resources to absorb turbulent waters and make investments in other viable channels. That’s what gives me an extra measure of confidence despite some recent choppiness in NVDA stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.