Nvidia Stock Has Been Damaged by Crypto Before. Why It Matters Again Now.

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Investors in graphics chip maker


could soon be in for a rude awakening following a Chinese government crackdown on cryptocurrency mining.

Since Beijing moved earlier this year to curb large cryptocurrency-mining operations, the Chinese market has been flooded with inexpensive, used graphics cards, made by Nvidia (ticker: NVDA), that were once used to produce Ethereum, New Street Research analyst
Pierre Ferragu
wrote Thursday in a note. The market saturation, and declining mining activity overall, prompted the analyst to caution investors about Nvidia stock.

Ferragu says a big, rapid slowdown in cryptocurrency activity and an oversupply of Nvidia’s powerful chips could cut into the company’s revenue. Cryptocurrency has become an increasingly important part of the company’s business in recent quarters. According to Ferragu’s research, cryptocurrency revenue may have amounted to $500 million to $1 billion in the first quarter, or roughly 10% to 20% of overall revenue of $5.7 billion.

Finance Chief
Colette Kress
said recently that in the first quarter, the company received about $150 million of revenue from cryptocurrency-specific chips it designed. Nvidia’s graphics chips were originally meant for videogames, but gamers couldn’t get their hands on them, so the company produced a cryptocurrency-specific version.

Kress predicted $400 million in second-quarter sales of the crypto mining chips, but how much of overall revenue is linked to crypto mining isn’t clear. Miners continue to use the company’s regular graphics processors, although the Nvidia has reduced the mining capacity of those cards. Nvidia has no accurate way of figuring out how many of its chips are used for mining versus videogames, Kress has said.

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Ferragu’s concern is the result of recent history. Back in 2018, a crash in cryptocurrency prices—including for Bitcoin and Ethereum—had a significant impact on Nvidia. Miners had been gobbling up its cards and the slide in prices prompted miners to unload them on the used-equipment market.

Nvidia’s sales took a hit for four straight quarters, with revenue declines of as much as 31%. Ferragu noted that shares pulled back more than 50% in the second half of 2018. He called the current situation similar, but said that it wasn’t clear when the stock might drop.

Nvidia’s fundamentals remain strong, Ferragu said, but he urged investors to wait for a pullback to buy the stock. He rates Nvidia at Neutral with a target of $143 for the price.

Write to Max A. Cherney at max.cherney@barrons.com

Harry Byrne

Harry Byrne

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