NVDA: Q3 Cryptocurrency upside

Last quarter, which spanned 5/1/17 through 7/30/17, NVDA sold GPUs for cryptocurrency mining. Total revenue for the quarter was $2.23B and it was estimated that about $250M of the Q2 revenue was for cryptocurrency mining applications. That’s about 11% of total revenue.

Here are some facts and some assumptions:

  1. Cryptocurrency mining demand will be positively correlated with the price of Bitcoin and other cryptocurrencies. Thus, the higher the price of cryptocurrencies, the higher the incentive for someone to mine cryptocurrencies.

  2. The amount of new units of cryptocurrencies is regulated by increasing the complexity of calculations needed to mine cryptocurrencies. To limit the amount of new supply, the computational calculations required to solve a problem to mine a bitcoin is increased. This must also mean that the complexity trend to mine bitcoins must be positive. As GPUs get more powerful, the complexity of calculations required to mine must also be increased to prevent a flood of new supply into the bitcoin stock. As miners buy more GPUs, the complexity of calculations must be increased further.

  3. NVDA is developing GPUs that are specific for cryptocurrency mining. AMD is not. This will help NVDA prevent its GPUs used for mining from being sold on the secondary market for gaming uses. AMD will have no such control over the secondary market.

  4. NVDA has said that it will make sure that it can take advantage of fluctuations in demand for GPUs for mining. AMD decided not to build inventory.

  5. NVDA believes that demand for cryptocurrency mining is here for the longterm but that we can expect fluctuations in demand. NVDA wants to take advantage. AMD is being more cautious and is in a weaker position because a) it cannot supply control spillover in the gaming market without GPUs that are specific for mining, and b) it may have more backorder situations which will lead to lost opportunities.

  6. The average price of Bitcoin during NVDA’s Q2 was $2349. The average price of Bitcoin during NVDA’s Q3 (partial quarter from July 31 through August 21) was $3598. The price of Bitcoin can be found here: https://www.coindesk.com/price/ . Q3 is about 24% over.

Based on the above, it appears that NVDA will have another great quarter for selling GPUs into cryptocurrency mining. Since the price of Bitcoin is higher, demand for mining is probably higher. If AMD has inventory supply issues, then AMD may lose some business in BOTH the cryptocurrency mining as well as the gaming markets.

NVDA’s quarter ends around October 29th and we will be able to estimate potential upside (based on Bitcoin prices during the quarter) after the quarter ends but before NVDA reports Q3 results in November. The higher the average Bitcoin price during Q3, the higher the potential upside to NVDA’s revenue. This might be something to consider if one is considering a trade prior to earnings announcement.

Chris

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OK, but how many GPU’s have they sold for mining? What fraction of their total revenue/profit is that? Can you use the same GPU to mine different types of coins (Bitcoin, Ethereum, etc.)?

The maximum number of Bitcoins allowed to exist is 21 million. Right now, there are roughly 16 million in existence. (At the current price of $4400/bitcoin, that’s probably more than $70 billion.) I don’t know how that works for other cryptocurrencies. I also don’t know how many computers are mining Bitcoin relative to other currencies.

I had mentioned ASIC’s (very specialized computer chips) used in bitcoin mining, but apparently GPU’s have come back to surpass them in popularity. Historically, I think mining started with regular computer CPU’s (e.g. Pentium), then went to GPU’s, then ASIC’s, and now back to GPU’s. That is another issue, though - for mining, GPU’s may get replaced again by some other kind of processor.

EdGrey

This exact question was asked and answered in the earnings conference call. I forget the answer off the top of my head, but as something like $150-$300 million. Nvidia CEO thought bitcoin mining was here to stay, although would be quite volatile from quarter to quarter, as bitcoin is not the only coin out there and new currencies would continue to be created.

Whether or not bitcoin type demand continues strong or not into next quarter, Nvidia had a “slow” quarter in the data center (that is also volatile from quarter to quarter - although I am sure much less than bit coining sort of thing is) because Volta was just introduced in the quarter, which dampened demand for the older chips, and it is expected that Volta deliveries will be quite strong in Q3.

In Q2 it was upside surprise in gaming PC chips. Nvidia always seems to have some aspect of demand for its product going quite well.

The stock is up 700% over the last couple of years, and yet its PE is still just a bit north of 30, meaning the market barely kept up with the business growth over this period of time, perhaps just now catching up to it (or perhaps not).

Anyway, more words than necessary to answer the question. You can easily find this number in the Q&A section of earnings call. It was not as much as you think, but then again what is a few hundred million here or there…

Tinker

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3) NVDA is developing GPUs that are specific for cryptocurrency mining. AMD is not. This will help NVDA prevent its GPUs used for mining from being sold on the secondary market for gaming uses. AMD will have no such control over the secondary market.

Actually, Nvidia is making a GPU just for bitcoin mining because the bitcoin miners are sucking up the gaming GPU supply. In order to combat this, they’ve been selling the gaming GPUs only with other gaming items to try to stop this. From the transcript:

There are still small miners that buy GeForces here and there, and that probably also increased the demand of GeForces. There were a lot of shortages all over the world. And as we go into this quarter, there’s still cryptocurrency mining demand that we know is out there. And based on our analytics and understanding of the marketplace, there will be some amount of demand for the foreseeable future. But it’s also the case that there were gamers whose needs and demands were not filled last quarter.

This is why it’s hard for Nvidia to determine what the bitcoin market was. Now if the bitcoin users by specific GPUs, they’ll be able to tell better in the future.

Peace,
Dana

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