Nvidia: $5,000 Bitcoin could be a 2023 black swan (NVDA)

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by Martin Nancekievill/iStock via Getty Images

Events and Black Swan Thesis

Recently, Eric Robertsen, Head of Research at Standard Chartered Bank, listed a few black swan events that could occur in 2023. At the top of the list is the possibility that Bitcoin (BTC-USD) prices drop another 70% to around $5,000. And at the same time, gold prices would rise by around 30% (and full disclosure, I don’t have exposure to bitcoin but do have some exposure to gold). His reasons are listed below, and I consider them quite plausible:

Eric Robertsen said in the note that given a number of factors such as insufficient funds or bankruptcies causing more crypto service providers to shut down, more investors are likely to start having cold in the eyes and proceed with the withdrawal of their assets. This, he said, will most likely lead investors’ attention to be directed towards good old gold. Robertson predicted that the price of gold could reach around $2,250 an ounce, an increase of around 30%.

The rest of this article focuses on the impacts of such a black swan event on Nvidia (NASDAQ:NVDA). Black Swan events, by definition, are difficult or impossible to predict but generate sequential events, which I think is exactly what NVDA is facing here in terms of Bitcoin exposure.

NVDA used to report its exposure to cryptocurrency mining. But he stopped reporting it recently. Management has repeatedly emphasized that crypto mining no longer generates a material impact on NVDA in its earnings reports for the past few quarters, while acknowledging that there are a variety of mechanisms for potential impact. The following exchange from its Q3 2022 earnings report is a good example. Quotes are slightly edited with emphasis added by me.

Question from Joseph Moore of Morgan Stanley: I wonder if you could talk about looking back at the impact of crypto. Obviously that’s gone from your numbers now, but do you see any potential for liquidation of GPUs that are in the mining network, impact in the future? And do you foresee blockchain being a major part of your business at some point?

Responses from Jensen Huang (CEO of NVDA): We do not expect blockchain to become a major part of our business in the future. There is always a resale market. If you look at one of the major resale sites, eBay, for example, there are used graphics cards for sale all the time. And the reason is that a 3090 someone bought today is upgraded to a 4090 or 3090 they bought a few years ago is upgraded to 4090 today. This 3090 could be sold to someone and appreciated if sold at the right price. And so, the volume of – the availability of used and second-hand graphics cards has always been there. And the inventory is never zero. And when inventory is larger than usual, like any supply demand, it would likely drive prices down and affect the lower end of our market.

Admittedly, it is difficult to estimate the impact. But I will try anyway in the rest of this article. And my conclusion is that NVDA management probably underestimated the impact of a crypto crash. As you will see next, I still see significant crypto impacts on NVDA’s prices (which reflects the psychological impact) and also on NVDA’s profitability (which reflects the fundamental impact).

Historical Perspective: The Crypto Crash of 2018

The last time we experienced a similar cryptocurrency crash was in 2018, as shown in the charts below. As you can see from the top panel, Bitcoin USD prices fell from around $19,000 to around $3.6,000 in about 1 year, which translates to an annual decline of 81%. And at the same time, NVDA’s year-over-year growth rates for operating revenue (on a quarterly basis) fell from around +50% to -45%. At that time, NVDA was still reporting its exposure to cryptocurrency mining. Specifically,

Quoting NVDA’s own estimates: its crypto-related sales were around $0.6 billion (about 5.7% of its total sales of $10.6 billion). While other independent analysts (such as Business Insider’s Mitch Steves) have provided a much higher estimate of $1.95 billion in crypto/blockchain-related revenue (about 18.4% of his overall lending revenue). ‘era) at the time.

Source: Author based on data from Seeking Alpha

And now?

As mentioned above, NVDA has stopped providing breakdowns of its crypto-related revenue. But my view is that its management is still underestimating the impact today, just as it did in 2018, for at least two reasons detailed below.

First, NVDA stock prices are always closely correlated to Bitcoin prices. Of course, the correlation does not reveal a causal relationship. And therefore, such a correlation is best interpreted as a psychological impact. Nevertheless, the psychological impacts are just as important as the fundamental impacts in investing. Namely, so far since 2022, Bitcoin prices are undergoing a correction similar to that of 2028. As shown in the bottom panel of the chart above, Bitcoin prices have contracted from a peak of around $65,000 at the end of 2021 (in the November period) to ~$17,100 now, around 1 year again. Such a drop translates to a 74% annual drop, close to the 81% drop seen in the 2018 episode. is corrected by about 52% from its maximum value in about a year in tandem.

Source: Alpha Data Research

The correlated movements above are also seen over a broader time frame, as seen in the following image below. This chart shows the correlation between Bitcoin price movement and NVDA price movement over the past ten years since 2014. As seen, the average correlation is positive by 0.26 in the past and the current creation is positive by 0.183.

Source: Alpha Data Research

Second, NVDA earnings are also positively correlated with Bitcoin prices. The following chart illustrates the correlation between Bitcoin prices and NVDA’s diluted EPS on a quarterly basis. As you can see, the average correlation is even stronger by 0.408 over the past ten years. And currently, the correlation is hovering around 0.757, a pretty strong level.

But of course, correlation always equals causation. However, in this case, I suspect there is a good possibility that this is the case. As you can see from the following chart, I’m plotting the correlation between Bitcoin prices and QCOM and INTC’s diluted EPS on a quarterly basis this time. I know for a fact that these two chipmakers have little or no exposure to Bitcoin mining. And indeed, their EPS shows a weak or negative correlation with Bitcoin prices (average of 0.025 in the case of QCOM and -0.117 in the case of INTC).

Source: Alpha Data Research

Source: Alpha Data Research

Summary of Risks and Final Thoughts

To recap, the peak of Robertsen’s black swan events in 2023 is another 70% drop in Bitcoin prices to around $5,000. And I consider this plausible given factors such as insufficient funds, bankruptcies and the psychological shift of investors to more familiar safe-haven assets like gold.

Such a black swan event could have a large and negative impact on NVDA prices due to a combination of physical impact and fundamentals – which are both important and intertwined in investing. Based on my results, I think NVDA management is still underestimating the impact of their crypto exposure, likely like they did in 2018. Over the past year, BTC prices are decreased from ~$65,000 to ~$17,000 (translating to an annual decline of approximately 74%), and NVDA’s year-over-year growth rates for operating revenue (on a quarterly basis) decreased from an expansion of around 50% to a contraction of 16.5%. According to this recent Reuters report, NVDA’s supply of crypto-mining chips is still contributing to its sales to a large extent. In the meantime, an investment in NVDA also carries substantial valuation risk at this stage. Its P/E FY1 is around 48x, more than double that of AMD’s 20x and almost quadruple that of INTC (14x) and QCOM (11x).

All in all, I don’t recommend committing at this point. The downside is just too great with the combination of negative psychological Bitcoin price impacts, earnings impacts and also valuation risks.

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