Graphics cards are in short supply as a result of cryptocurrency miners buying them up in an attempt to profit from the ongoing mania. Both NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) are having trouble keeping up with demand, leading to elevated prices and slim pickings for PC gamers.
Both companies are trying to ramp up production. CEO Lisa Su said as much during AMD's latest earnings call, and NVIDIA CEO Jensen Huang recently told TechCrunch that "we have to build a whole lot more" in order to keep up with demand. As long as cryptocurrency prices remain high enough to sustain demand from miners, this strategy makes sense. But it could backfire for both companies when the mania eventually comes to an end.
A tough spot
NVIDIA and AMD want to put as many graphics cards in the hands of gamers as possible. "Cryptocurrency is not our business," Huang told TechCrunch. But with those mining cryptocurrencies buying through the same channels as gamers, there's no easy way to do that without boosting supply.
But growing production of GPUs, beyond what gamers alone could consume, comes with a significant risk. If the bubble in cryptocurrencies comes to an end, a big source of demand for both companies could disappear quickly and without much warning. That would solve the undersupply problem, but it could create an oversupply problem, pushing down prices in the process.
Exacerbating that issue would be a flood of used graphics cards hitting the market from cryptocurrency miners unable to turn profit. Those cards wouldn't be all that desirable, given they were likely run at full load 24/7, shortening their life-span. But that deluge would increase supply even further.
Cryptocurrency prices have tumbled so far this year as the euphoria of 2017 began to fade away. Ethereum, the second-largest cryptocurrency by market capitalization and a key driver of demand for graphics cards, has lost about two-thirds of its value since early January. The price could plunge even further if reports of specialized Ethereum mining hardware, capable of supplanting GPUs, prove accurate.
The days of dramatically overpriced graphics cards won't last forever, because all bubbles eventually burst. That's good for gamers, but not so much for NVIDIA and AMD.
An uncertain revenue hit
When demand from cryptocurrency miners vanishes, both NVIDIA and AMD will lose a meaningful amount of revenue. Exactly how much is up for debate, since estimating how many graphics cards are ultimately being used for cryptocurrency mining isn't a simple task.
AMD believes that cryptocurrency was responsible for a mid-single-digit percentage of its revenue in 2017. Jon Peddie Research, which tracks GPU sales, puts it closer to 10%, depending on the split between NVIDIA and AMD. An analyst with Susquehanna Financial Group puts it as high as 20%. That 20% figure seems high, since that would represent almost all of AMD's revenue growth last year. Somewhere between 5% and 10% is probably a reasonable guess, although it could be higher.
For NVIDIA, the percentage is likely lower. The company generated quite a bit more total revenue than AMD last year, and Jon Peddie Research found that AMD was the primary benefactor of cryptocurrency-related demand. Still, how accurate any of these estimates are won't be apparent until the bottom falls out of the cryptocurrency market.
The worst-case scenario for NVIDIA and AMD: a ramping of production at the precise moment demand for GPUs from cryptocurrency miners falls off a cliff, leading to an oversupply of graphics cards made even worse by miners dumping their used cards. This will hurt AMD more than NVIDIA, but neither will escape unharmed.