What happened
Semiconductor developer NVIDIA (NASDAQ: NVDA) posted strong fourth quarter results last night with a side of optimistic outlook for the next reporting period. The stock fell a whopping 8.5% on Thursday anyway, as sometimes even an analyst report isn’t enough to support a sky-high stock like that of NVIDIA.
So
In the fourth quarter of 2020, NVIDIA’s revenue grew 62% year over year to $ 5 billion. Adjusted earnings were up 64% to reach $ 3.10 per diluted share. Your average analyst would settle for a profit of nearly $ 2.81 per share on revenues of about $ 4.82 billion. The great results were driven by the high demand for NVIDIA’s data center processors and gaming products.
On the way to the report, shares of NVIDIA had gained 112% in 52 weeks. The stock traded at a nosebleed-inducing 95 times lagging earnings and 86 times free cash flow, paving the way for a significant price cut despite a strong earnings report. Today, you can pick up NVIDIA stock for the slightly less exorbitant valuation ratios of 93 times adjusted earnings or 71 times free cash flow.
Image Source: NVIDIA.
What now
Some investors are also concerned about artificial growth due to soaring cryptocurrency prices. In particular, NVIDIA’s graphics processors are very efficient at mining Ethereum (CRYPTO: ETH) tokens and the smart-contract cryptocurrency saw prices skyrocket by 568% over the past year. If Ethereum miners buy tons of NVIDIA’s graphics cards, fewer units will remain on store shelves for true gamers. All of this happens during a market shortage of semiconductor manufacturing capacity, further reducing processor requirements. This all sounds like good news for NVIDIA, but the idea is that it will also expose the company to significant market risk if Ethereum prices crash again, which will reduce demand for token mining hardware.
NVIDIA management has acknowledged this concern and has taken steps to limit the appeal of Ethereum mining from its gaming hardware. Additionally, CEO Jensen Huang argues that the cryptocurrency mining market is a fairly small part of his company’s end-user market. Hyper-specialized application-specific integrated circuits (ASICs) play a much larger role in the crypto mining industry.
“I think this is going to be part of our business. It’s not going to be extremely big no matter what, and the reason for this is that when it starts to get big, there are more ASICs on the market, what kinds does it muffle Huang said during the fourth quarter earnings call. “When the market gets smaller, it’s harder for ASICs to support the R&D and so the spot miners, industrial miners come back and then we create [cryptocurrency mining processors]And so we expect it to be a small part of our business as we move forward.
The company can’t keep track of how people end up using the chips it sells, but Huang estimates that about $ 200 million of gaming product sales this quarter came from mining enthusiasts. That’s just 8% of $ 2.5 billion in sales.
All of this is to say that NVIDIA’s post-profit correction may have been amplified by Ethereum mining risk, and that particular threat doesn’t look that threatening. Therefore, you could argue that NVIDIA’s stock is being sold at a discount today – despite sky-high valuation ratios.