Why NVIDIA Stocks Stumbled Today, After Impressive Earnings Report

What happened

Semiconductor developer NVIDIA (NASDAQ: NVDA) posted strong fourth quarter results last night with optimistic forecasts for the next reporting period. The stock fell as much as 8.5% on Thursday anyway, as sometimes even an analysis report isn’t quite enough to support a skyrocketing stocks like that of NVIDIA.

So what

In the fourth quarter of 2020, NVIDIA’s revenue grew 62% year-over-year to $ 5 billion. Adjusted earnings increased 64% to $ 3.10 per diluted share. Your average analyst would have been content with a profit close to $ 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.

Prior to the report, NVIDIA shares had gained 112% in 52 weeks. The stock traded at 95 times earnings and 86 times free movement of capital, paving the way for a significant price drop despite a strong earnings report. Today, you can grab NVIDIA shares 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% in 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 happens during a market to scale semiconductor manufacturing capacity shortage, further limiting the power to the processor. 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 Took action to limit Ethereum mining’s appeal of 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. Hyperspecialized Application Specific Integrated Circuits (ASICs) play a much larger role in the crypto mining industry.

“I think it’s going to 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 come into the market, what kinds of it puts it in? muted, ”Huang said during 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 that to be a small part of our business as we go along. “

The company can’t know 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. This represents only 8% of a transport of 2.5 billion dollars.

All of this to say that NVIDIA’s post-profit fix may have been magnified by Ethereum’s mining risk, and this particular threat doesn’t look so threatening. Therefore, you could argue that NVIDIA shares are selling at a discount today, despite the sky-high valuation ratios.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging 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.

About Warren Dockery

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