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It looks like the cryptocurrency bubble is bursting. As of this writing, the price of Bitcoin (CRYPTO: BTC) has fallen below $ 30,000, wiping out its gains for the year. Bitcoin is now down more than 50% from its all-time high.
Other cryptocurrencies do even worse. Ethereum (CRYPTO: ETH) is down almost 60% from its peak, and the cryptocurrency Dogecoin (CRYPTO: DOGE) joke has crashed 75%.
Graphics chip developer NVIDIA (NASDAQ: NVDA) was one of the beneficiaries of the crypto bubble. The company’s graphics cards are useful for mining certain cryptocurrencies. This fact has boosted demand for graphics cards, contributing to shortages and high prices.
Image source: Getty Images.
NVIDIA sells some models specifically for cryptocurrency miners, but miners also buy many standard graphics cards through the same channels that PC gamers use. So it’s hard to say how much of NVIDIA’s gaming revenue is a side effect of the cryptocurrency bubble. NVIDIA’s gaming revenue more than doubled year-over-year to $ 2.76 billion in its most recent quarter.
What happens if crypto prices continue to fall? It wasn’t pretty for NVIDIA last time around.
From scarcity to overabundance of supply
The price of bitcoin and other cryptocurrencies has skyrocketed throughout 2017 and early 2018. Miners have taken over graphics cards, leading to shortages and high prices. Seems familiar?
NVIDIA’s quarterly video game revenue remained stable at around $ 1.8 billion until the third quarter of fiscal 2019, which ended in October 2018. Then it fell off a cliff as interest in cryptocurrency was waning. Gaming revenue fell below $ 1 billion in the fiscal fourth quarter of that year.
Chart by author. Data source: NVIDIA.
The crypto crash of 2018 led to bloated graphics card channel stocks, which drastically reduced sales for NVIDIA. Gaming revenues were depressed for about three-quarters before rebounding.
“The demand for crypto mining and its side effects have distorted quarter-over-quarter trends in the gaming industry and obscured its underlying trendline,” NVIDIA CFO Colette Kress said at the call for results for the fourth quarter of 2019.
Kress continued, “… in hindsight, we shipped a greater amount of desktop gaming products compared to where final demand turned out.”
What’s happening now is a turbo version of what happened in 2018. The total value of the cryptocurrency market at the top this time around was much higher than in 2018, topping $ 2 trillion. in April.
Actual graphics card shipments were up 24.4% in the first quarter year-over-year, according to Jon Peddie Research. The total value of these cards soared 370% thanks to inflated prices. Some of that demand has undoubtedly been driven by the pandemic, but much of it has to do with the fortunes of the cryptocurrency market.
Much like NVIDIA’s gaming revenue, NVIDIA stock was hit hard by the latest crypto crash. Shares fell in the last three months of 2018, as the extent of NVIDIA’s reliance on the demand of crypto miners became clear.
NVDA data by YCharts
NVIDIA’s stock surged again amid a cryptocurrency boom and a shortage of graphics cards. The company is now worth around $ 460 billion, about triple its peak value during the last cryptocurrency bubble. NVIDIA has made strides outside of gaming since then, particularly in the data center. But a sharp drop in income is possible, and perhaps likely, if crypto prices continue to fall.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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