In 2015 one could buy Nvidia (NASDAQ: NVDA) stocks for just 20 USD each; however, an unexpected growth of interest toward cryptocurrencies has changed the investors’ view of this company accordingly. The more the cryptocurrency market grew, the more people wanted to mine: individuals with 1 to 10 graphic cards as well as major investors, owning mining farms with thousands of graphic cards. All this led to increased demand for GPU, and the income of Nvidia has started growing, too. The management realized that the boost was temporary; nonetheless, they tried to get the most from the existing demand. As a result, there appeared a whole department engaged in development of GPU chips for mining.
Nvidia Stocks Decline
The cryptocurrency market reached its peak in the middle of December 2017, after which time it began declining; however, Nvidia kept making profit on graphic cards, with its stocks trading at 250 USD at the beginning of 2018, which meant a 1,200% profit in the previous 3 years. The investors started paying attention to the sums brought to the company by graphic cards for mining, and initially this information was revealed in Nvidia reports. However, during 2018 cryptocurrencies kept declining, the agitated demand for graphic chips subsided as well, and so did the company’s income. As a result Nvidia closed the department for GPU development and stopped giving the information about the income from them in a separate paragraph, revealing the data only in “Other”. In such a situation the investors decided to lock profit, and the price of the stocks fell to 130 USD.
In 2018 the Bitcoin price dropped for 85%, making mining unprofitable. As a result, big mining farms either put mining on a halt or started using the warmth emitted by the GPU chips for heating rooms, boiling water etc. For example, a Czech miner used the warmth for growing vegetables, and a Ukraine company employed their mining equipment in cloud graphic rendering as there exists demand form major movie makers for rendering of their content on remote graphic equipment.
The market experienced an inflow of used GPU chips, and the demand fell for 75%, which in its turn led to a decline in the price of mining equipment. There were more and more chips accumulating in Nvidia storage, which meant a decline in the price of its new products as well. The year 2019 became critical for the cryptocurrency market: the Bitcoin traded around 13,700 USD; with such prices the interest towards mining restored, and traders started paying attention to Nvidia stocks and discussing their future.
Will GPU Demand Surge?
However, should we hope for the stocks to test their maximums once again in the current situation? In my opinion, the situation has changed completely. Large mining companies that were put on a halt will simply start work; they will not need new equipment, so the demand for graphic cards will stay at its minimum. Next, let us imagine that there were, say, 100,000 miners in 2018. They were all equipped by graphic cards; the Bitcoin price fell, the income from mining started falling accordingly, so miners either sold their processors or started using them for other purposes.
GPUs are not gone, they are still on the market, and in case the demand for them grow, they will be enough to satisfy it. What is more, as long as the number of miners has reduced since 2018, a shortage of GPU chips will only appear if this number restores or becomes bigger. The cryptocurrency market now is not as agitated as it used to be, so it will be rather hard to attract new miners who can create a shortage of graphic chips.
There were times when the Bitcoin was discussed by shepherds via old-school Motorolas; however, nowadays the market is much calmer. That is why the growth of cryptocurrencies is not to be directly connected with the growth of Nvidia stocks. Unfortunately, for the last two quarters, Nvidia has been noticeably down, but there is a strong influence of the income already achieved, including on the cryptocurrency market.
|Q1 2019 (M)||Q4 2018 (M)||Q3 2018 (M)||Q2 2018 (M)||Q1 2018 (M)||Q4 2017 (M)||Q3 2017 (M)|
|OEM & Other||99||116||148||116||387||180||191|
Anyway, there is a positive dynamics in selling the equipment to car-makers: in particular, the company is collaborating with a research institute Toyota-Advanced Development in the field of designing, teaching and testing self-driven cars. Active development of autopilots all over the world maintains the demand for the produce used in this sphere. A possible thaw in the relationship between the USA and China may enhance the demand of Chinese companies for chips used in data centers; however, in this segment trade is restoring anyway.
Nvidia Purchase Mellanox Technologies
The income of Nvidia might also be influenced by the expected purchase of Mellanox Technologies (NASDAQ: MLNX). Mellanox Technologies has been the only producer of equipment for high-speed networks Infiniband and Ethernet since 2011. The company sells network interface cards, cables, software and integrated circuits. Quarter income of the company is currently around 305.0 million USD, net profit amounts to 48.6 million USD. The management of Nvidia announced their plans of purchase in March; the price is 6.9 billion USD; however, the Chinese government is yet to solicit the purchase. Currently positive relationship between the USA and China promises a success, which may yield a growth of Mellanox stock price up to 125 USD. This is the price specified in the contract between two companies. The fact that one of the Mellanox managers Sanghi Steve has bought 20,000 stocks of the company at the price of 110 USD each gives yet another reason for being sure that the purchase will happen and the stock price will grow. By the way, Sanghi Steve’s share in the company is now over 2 million USD.
The main rival of Nvidia is Advanced Micro Devises (AMD) with the stock price 31 USD. Nvidia looks overbought compared to AMD; however, this should be checked by a comparative analysis of the companies’ data. We will also look at a Chinese memory chips producer Micron (NASDAQ: MU):
|Nvidia||Advanced Micro Devices||Micron|
|Stock price ($)||162||31||40|
|Market Cap ($B)||98,51||34,15||43,75|
|Stocks in circulation ($M)||608||1101||1093|
|Net profit ($M)||394||16||840|
|Available Cash ($B)||7,80||1,19||6,68|
|All commitments ($B)||4,31||3,14||10,98|
|Aggregate assets ($B)||14,02||4,31||46,28|
|Short Float (%)||2,16||10,38||3,44|
Comparing these three companies, we can see at once that AMD is far behind its counterparts in terms of finance; what is more, market players consider its stocks to be overpriced: the P/E index is 124.76 while the short float is over 10%. At the same time, Micron with its P/E at 5.08 is considered undervalued, and its profit is much bigger than that of its counterparts. Of course, the price of stocks depends on their number in circulation. Nvidia has the least stocks in circulation, that is why their price is significantly higher than that of the rivals’ stocks. What is more, Nvidia is going to buy stocks from the market: it is planned to spend 7.94 billion USD on this purpose until 2022.
If Nvidia increases the number of stocks in circulation up to 1,100 million stocks (which is roughly the number of stocks that the two other companies have in circulation), the stock price will drop to 89 USD, and the P/E will become 16.8. For example, the P/E of the sector where P/E is trading, is 15.8. All in all, we may say that the current stock price is fair, i.e. they are not oversold or overpriced. In August, the company will render a report on the 2^nd^ quarter of 2019; the expected growth of revenue is 2.55 billion USD which is 330 million USD more than the previous quarter. Seasonal factor does not influence Nvidia significantly, that is why, in case the forecasts turn out true, the stock price will rise as well.
Nvidia Stocks Tech Analysis
On daily time-frame the price is trading under 200-days Moving Average which reveals the following decline of the price down to 130 USD. If the price breaks through this support as well, it may fall as low as 95 USD. On the local minimum achieved in March the volume was not increased. This situation demonstrates a very moderate investor interest to the stocks, that is why their price is soon going to test this support line.
However, a positive report can change the chart dramatically. A breakthrough around 165 USD will be the first signal of subsequent rise. Later Nvidia stocks will meet a more serious resistance around 194-200 USD. Only good financial results and a successful purchase of Mellanox will make investors raise the demand for the stocks, which will, in its turn, raise the price above 200 USD. In this case the next goal will be resistance at 260 USD.