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What happened
Semiconductor developer NVIDIA (NASDAQ: NVDA) last night released strong results for the fourth quarter with a side to optimistic forecasts for the next reporting period. The stock fell as much as 8.5% on Thursday anyway, as sometimes even an astonishing analytics report isn’t quite enough to support a booming stock like NVIDIA’s.
So what
In the fourth quarter of 2020, NVIDIA’s revenue grew 62% year-over-year to $ 5 billion. Adjusted earnings climbed 64% higher, landing at $ 3.10 per diluted share. Your average analyst would have settled a profit of nearly $ 2.81 per share on sales of around $ 4.82 billion. The excellent results were driven by strong demand for data center processors and gaming products from NVIDIA.
In the report, NVIDIA shares had gained 112% in 52 weeks. The stock traded at a nosebleed 95 times trailing profit and 86 times free cash flow, paving the way for a significant price drop despite a strong earnings report. Today, you can grab NVIDIA stock for slightly less sky-high valuation ratios of 93 times adjusted earnings or 71 times free cash flow.
Image source: NVIDIA.
Now what
Some investors are also worried about artificial growth resulting from the rise in cryptocurrency prices. Specifically, NVIDIA graphics processors are very efficient at mining. Ethereum (CRYPTO: ETH) smart contract tokens and cryptocurrency have seen prices skyrocket 568% over the past year. If Ethereum miners buy tons of NVIDIA graphics cards, that leaves fewer units on store shelves for real gamers. All of this occurs during a shortage of semiconductor manufacturing capacity, which further constrains processor supplies. This all sounds like good news for NVIDIA, but the idea is that it also exposes the company to significant market risk if Ethereum prices collapse again, killing demand for token mining hardware. .
NVIDIA management has recognized this concern and has taken steps to limit the attractiveness of Ethereum mining of its gaming hardware. Additionally, CEO Jensen Huang argues that the cryptocurrency mining market represents a relatively small share of the end-user market for his business. Hyper-specialized application-specific integrated circuits (ASICs) play a much larger role in the crypto-mining industry.
“I think it will be part of our business. It won’t become hugely important no matter what and the reason is that when it starts to grow, more ASICs will hit the market, what kinds of are muting it Huang said on the fourth quarter earnings call. “When the market gets smaller, it’s harder for ASICs to support R&D and therefore one-off miners, industrial miners come back and then we’ll create [cryptocurrency mining processors]. And so we expect this to be a small part of our business as we move forward. “
The company can’t figure out how people end up using the chips it sells, but Huang estimates that around $ 200 million in gaming product sales this quarter came from mining enthusiasts. That’s just 8% of a $ 2.5 billion premium transport.
All of this to say that NVIDIA’s post-profit correction may have been magnified by Ethereum’s mining risk, and this particular threat doesn’t seem so threatening. Therefore, you could argue that NVIDIA shares are selling at a discount today – despite the sky-high valuation ratios.
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