Bitcoin Might Be Rallying but a ‘Crypto Winter’ Could Freeze Nvidia’s Stock

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Bitcoin
and other cryptos bounced sharply on Friday with the world’s largest digital currency rallying above $40,000 for the first time in two weeks.

But one analyst is warning of the impact of a “crypto winter,” arguing it could be especially tough on chip maker

Nvidia

(ticker: NVDA).

Nvidia is a major supplier of graphics chips used for processing transactions, or mining, on the Ethereum network. Demand for mining chips took off in 2021 as prices for

Ether,
the native token of the network, surged and mining capacity increased sharply.

But Ether has tumbled — recently trading around $2,900 per token, down from its all-time high of $4,867 on Nov. 10, 2021. The slump makes mining less profitable, reducing the value of tokens that miners receive in exchange for processing transactions.

The mining market may now be saturated with Nvidia’s graphics processing units, or GPUs, according to New Street Research analyst Pierre Ferragu. That could be bad news for Nvidia’s future production and pricing power, he said, and it has downside implications for the stock.

The bear-case is a “crypto winter” or long period of deeply depressed prices. The last time that happened, in 2018, prices for Bitcoin and Ether, the two major tokens, fell more than 75% from all-time highs and took more than a year to recover. Nvidia’s stock suffered too, falling 31% in 2018.

“If the stock reacts like it did in 2018, we see material downside to $150,” Ferragu said. A fall of that magnitude would shave nearly 40% from Nvidia’s recent price at around $240.

Longer term, the Ethereum network is expected to transition from a “proof of work” system to “proof of stake.” The new system should sharply reduce computing demands on the network, and reduce demand for Nvidia’s GPUs. It’s not expected imminently and could be delayed by technical hurdles. But eventually, said Ferragu, “this turns the crypto winter into a permanent mining winter.”

Nvidia’s GPUs primarily go into gaming PCs, data centers, and other corporate markets. But the company has benefited from Ethereum miners adapting its chips for processing crypto. At risk, in Ferragu’s view, is revenue from Nvidia’s GeForce lineup. Revenue from that product line was more than $3 billion over normal gaming trends in 2021, he estimated. Some of that resulted from gaming demand, but he estimated that $2 billion, or two-thirds, came from Ethereum mining.

Granted, Nvidia has plenty of other growth drivers, including gaming, autonomous driving, and data centers. The company is expected to report sales of $31.3 billion this year, up from $25.8 billion in 2021. Earnings per share are expected to hit $5.13, up from $4.18 in 2021.

Much of Wall Street backs the stock with Buy ratings; the average price target is $345, according to FactSet.

Betting against Nvidia hasn’t paid off. The shares rocketed 125% last year, on top of 122% gains in 2020. It’s down 18% this year, trailing the 13% decline in the

PHLX Semiconductor
index. But it’s still highly valued, trading at a 44% premium above the average semiconductor stock, based on 2024 estimates.

Ferragu has a Hold rating on the shares and cut his target to $250 from $270. He wrote that he would “buy the weakness without hesitation” in a broad crypto pullback. For now, though, cryptos appear to be back in rallying mode.

Write to Daren Fonda at [email protected]