What happened
Shares of graphics-chip maker NVIDIA (NVDA 1.02%) declined 6.8% on Wednesday. For context, the S&P 500 was essentially flat, edging down just 0.04%.
So what
We can probably attribute NVIDIA stock's drop to two factors. First, tech stocks in general were down on Wednesday, as some investors rotate to other sectors. For instance, shares of Amazon.com and Facebook fell 2.7% and 4%, respectively.
Image source: Getty Images.
The second reason -- probably the bigger reason -- is that NVIDIA stock's decline on Wednesday was probably a continuation of its decline that began on Tuesday stemming from a negative Wall Street analyst note regarding the company's cryptocurrency business. The Mizuho analyst reportedly said that he believes the use of graphics processing units (GPUs) to "mine," or generate, cryptocurrency could decrease considerably in 2018. The primary reason he cited was his belief that Ethereum will change protocols to one that doesn't need to be mined.
Ethereum, the second largest cryptocurrency, is the digital currency that has been driving sales of GPUs made by NVIDIA and rival Advanced Micro Devices for crypto-mining. In the second and third quarters, NVIDIA generated greater than 6.7% and 2.7%, respectively, of its total revenue from selling graphics cards for mining digital currencies. We don't know exact numbers because NVIDIA can't know how many people are buying its GeForce GTX cards, which are made for gaming, to use for mining cryptocurrency. It can only know how many of its application-specific graphics boards it sells.
Now what
There's no need for investors to change course, in my view. Granted, NVIDIA's revenue has received a nice boost this year from soaring cryptocurrency prices, but the crypto business should be considered just icing on the cake. The company has solid long-term growth potential stemming from its core computer gaming business, and from fast-growing emerging tech trends such as artificial intelligence and driverless vehicles.
Moreover, NVIDIA stock is richly valued and has run up big over the past two years, so it's prone to good-sized pullbacks. A nearly 7% drop -- and the 9.4% decline during the first three trading days of this week -- is a drop in the bucket relative to the stock's 84.6% return in 2017, through Wednesday, and its 109% over the one-year period. The broader market has returned 19.5% and 21.7%, respectively, over these periods.
