NVIDIA’s (NVDA, Financial) stock has grown more than fivefold since early 2016; despite the monumental surge of 166% in the last 12 months the stock still keeps breaking its 52-week highs. The strong growth surge is clearly the byproduct of NVIDIA’s revenue growth rate, which increased from sub-10% in fiscal 2016 to the current above-50% levels. There are several catalysts that are working in NVIDIA’s favor that will allow the company to continue the current growth for some more time.
"Gaming revenue was $1.19 billion, up 52% year on year and up 15% from the first quarter. This reflects the vibrant gaming ecosystem, underpinned by continued excitement over our recent launch GPUs and other technologies, great games and growing interest in e-sports." –Â NVIDIA Second-Quarter Earnings Call
Gaming is the biggest revenue earner for NVIDIA, and an above-50% growth rate is never easy to achieve. One of the main reasons for the recent surge in gaming revenue is the cryptocurrency boom. In its second-quarter 2018 earnings report, NVIDIA said it saw a $150 million boost from miners buying its chips to help mine cryptocurrencies like ethereum.
Mining cryptocurrencies is not an easy job. It requires complex algorithms working at high speeds. NVIDIA’s GPUs are the most efficient products available in the market. The higher the demand for mining or ethereum, the higher the demand will be for NVIDIA’s GPUs. But the problem is that no one really knows how far and how long the current cryptocurrency boom will last. It could continue surging for many more quarters, or things could easily slow down in the very next quarter.
With nearly $150 million – and a major portion of NVIDIA’s gaming revenue growth – being fueled by cryptocurrency demand, it will be difficult predict the stability of the growth in the long term. The good news is that NVIDIA’s gaming revenue is not completely dependent on cryptocurrency demand, but the surge in growth has definitely come from this segment.
“The cryptocurrency Cassandras are starting to look right. The sector has lost about a third of its market value since peaking in early June, pushing it into what traditional equity market analysts label as a bear market. Bitcoin, the largest of the digital currencies, is down about 20% from its peak of $3,000, reached June 12. Smaller rivals such as ethereum and ripple are getting hit even harder.” –Bloomberg
If things slow down in the cryptocurrency world, NVIDIA’s gaming revenue growth will slow down, which is not a bad thing because NVIDIA will still grow at a strong rate for many more years. That’s because they positioned themselves in a very strong place to exploit growth in Cloud, Artificial Intelligence and Auto.
But that presents a very real investor problem. NVIDIA’s current 11.25 times sales valuation expects the current growth rate to continue forever. Even a slight drop in growth rate could have a huge impact on NVIDIA’s stock prices. That’s the reason why I want to draw investors’ attention to the cryptocurrency boom, which contributes quite a bit to the growth surge. And if the market slows down, NVIDIA’s growth rate in the gaming segment will drop a bit, but the reaction in the stock market could be wild.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
