Over the long term, driven by strong demand for its chips from data centers and companies incorporating artificial intelligence, Nvidia (NASDAQ:NVDA) stock will almost certainly outperform the Nasdaq exchange and the S&P 500. In the short term and the medium term, however, there are multiple indications that NVDA stock is poised to be badly damaged by the bursting of the crypto bubble.
In previous columns about Nvidia, I’ve warned that its stock performance could be derailed by a crypto plunge. But recent developments have made me much more certain that cryptos are poised to tumble soon and that the retreat is likely to lower Nvidia’s stock price by a sizeable amount.
What’s more, even if cryptos don’t sink tremendously, new developments have left Nvidia’s revenue from crypto miners poised to tumble.
The Bursting of the Crypto Bubble
Defying the forecasts of crypto bulls, Bitcoin (BTC-USD) and other prominent crypto names have plunged in recent weeks. In the last three months, Bitcoin itself has tumbled 37%, Ethereum (ETH-USD) has given back 38%, and Cardano (ADA-USD) has slumped 49%. And while I understand that there are many thousands of other cryptocurrencies, some of which have been rallying recently, I doubt whether the jumps of those flash-in-the-pan names will be sustained as the general macro environment for cryptos becomes more bearish.
Macro trends are becoming more difficult for cryptos for two reasons. One is that U.S. government stimulus is rapidly fading, while the Federal Reserve is about to tremendously pull back its own accommodations and has already begun the process of doing so. The recent, sharp pullback of the top cryptos in the wake of the stimulus cuts and the inflation surge has left me even more convinced that government stimulus, rather than inflation or concerns about traditional currencies is the primary factor that determines crypto prices.
And the other macro factor that will make the environment more difficult for cryptos is increased government regulation. In the U.S., Securities and Exchange Commission (SEC) Chairman Gary Gensler wants to regulate crypto exchanges this year, while the IRS is also cracking down on cryptos.
And ominously for Nvidia and NVDA stock, the Russian central bank recently urged the country’s government to ban crypto mining. That’s problematic for Nvidia because “Russia is the world’s third-largest player in bitcoin mining, behind the United States and Kazakhstan,” according to CNBC.
Moreover, Kazakhstan’s government could impose new regulations on crypto after mass protests there. Saying the quiet part out loud, Russia’s central bank complained that cryptos hurt its ability to control monetary policy.
I’ve long warned that governments will vehemently oppose cryptos for that reason, and the statement by the Russian central bank validates my thesis. Consequently, I believe that we’ve just seen the tip of the iceberg when it comes to government regulation and stifling of cryptos.
NVDA Stock and Crypto Mining
In an intriguing column, published on Dec. 27, Seeking Alpha contributor EnerTuition explained that the demand for gaming graphics cards by crypto miners has greatly pushed up the average selling prices of Nvidia’s graphics cards. In fact, EnerTuition says that in some cases, the prices of Nvidia’s chips have doubled in less than 18 months, and they blame the increase on crypto miners.
So if crypto prices plunge and crypto miners consequentially stop buying Nvidia’s gaming cards, Nvidia’s overall gaming revenue will probably tumble. And since the revenue of Nvidia’s gaming business came in at $2.94 billion in the third quarter, out of its total Q3 revenue of $7.1 billion, such a plunge would indeed be a big deal for NVDA stock.
Meanwhile, even if cryptos don’t plunge, Nvidia’s sales from crypto miners could be about to tumble. That’s because of a few factors, including the possibility of Russia banning mining and Intel’s (NASDAQ:INTC) entrance into the gaming card market this quarter. Additionally, the Seeking Alpha contributor points out, Ethereum’s likely imminent switch to a proof-of-stake model will meaningfully undermine demand for Nvidia’s gaming cards.
Nvidia’s revenue from crypto miners looks poised to tumble, meaningfully lowering the company’s top and bottom lines. At that point, investors will probably be able to buy the shares at a much lower price, so it makes sense to wait for awhile longer before hitting the buy button on the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Ford, Plug Power and Exxon. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.