what happened
Semiconductor developer NVIDIA (NASDAQ: NVDA) achieved strong results in the fourth quarter last night, with optimistic guidance for the next reporting period. The stock dropped to 8.5% on Thursday anyway, as even an analysts stumble report is not quite enough to support a rising stock like NVIDIA.
Approximately
In the fourth quarter of 2020, NVIDIA’s peak revenue rose 62% year-on-year to $ 5 billion. Adjusted earnings rose 64% to $ 3.10 per diluted share. Your average analyst would have earned $ 2.81 per share on sales in the region of $ 4.82 billion. The excellent results were driven by the huge demand for NVIDIA’s processors and game products for data centers.
In the report, NVIDIA’s shares rose 112% in 52 weeks. The stock is trading at a nosebleed, earning 95 times the backlog and 86 times the free cash flow, providing the basis for a significant price drop despite a strong earnings report. Today, you can pick up NVIDIA’s shares for the slightly less exorbitant value 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 due to rising cryptocurrency prices. Specifically, NVIDIA’s graphics processors are very efficient in mining Ethereum (CRYPTO: ETH) tokens and the smart contract cryptocurrency have skyrocketed prices by 568% over the past year. When Ethereum miners buy tons of NVIDIA graphics cards, fewer units remain on store shelves for real players. All this happens during a shortage of semiconductor manufacturing capacity in the whole market, which further limits the processor supply. This all sounds like good news for NVIDIA, but the idea is that it also exposes the company to significant market risks if Ethereum prices collapse again, reducing the demand for token mining hardware.
The NVIDIA management acknowledged this concern and took steps to limit the attractiveness of Ethereum mining of its gaming hardware. Furthermore, 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 sector.
“I think it’s going to be a part of our business. It’s not going to grow extraordinarily big, no matter what happens, and the reason for that is because more ASICs are coming on the market, what kind of dampening is that,” Huang said. said on the earnings call in the fourth quarter. “As the market shrinks, it’s harder for ASICs to sustain the R & D, and so miners, industrial miners come back and then we will [cryptocurrency mining processors]. And so we expect it to be a small part of our business as we move forward. “
The company cannot pinpoint how people end up using the chips it sells, but Huang estimates that about $ 200 million in sales of this quarter’s game products come from mining enthusiasts. That’s just 8% of a $ 2.5 billion top-line transportation.
All this means that NVIDIA’s correction to earnings may have been magnified by the Ethereum mining risk, and that the specific threat does not seem so threatening. Therefore, you could argue that NVIDIA’s shares are selling at a discount today – despite the high valuation ratios.
This article represents the opinion of the author, who may not be in agreement with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! Questioning an investment thesis – even one of our own – helps us all to think critically about investments and to make decisions that help us become smarter, happier and richer.