NVIDIA (NVDA 3.71%) reported powerful fiscal first-quarter 2019 results after the market close on Thursday. The graphics processing unit (GPU) specialist's revenue jumped 66%, GAAP earnings per share soared 151%, and EPS adjusted for one-time factors rocketed 141%. Bottom-line results demolished Wall Street's expectation, and the top line comfortably beat the consensus.
NVIDIA stock closed down 2.2% on Friday. This is a small pullback considering shares have returned 110% over the one-year period through Friday. Nonetheless, the market's reaction likely confused some investors. We can attribute this response to management's comments on the earnings call that sales to the cryptocurrency market are poised to decline significantly beginning in the second quarter.
Let's explore this situation using the framework of management remarks on the Q1 earnings call.
Image source: Getty Images.
For reference, here's how NVIDIA's market platforms performed in the quarter.
|
Platform |
Q1 Revenue |
Change (YOY) |
|---|---|---|
|
Gaming |
$1.72 billion |
68% |
|
Data center |
$701 million |
71% |
|
Professional visualization |
$251 million |
22% |
|
Auto |
$145 million |
4% |
|
OEM and IP* (Cryptocurrency) |
$387 million ($289 million) |
148% |
|
Total |
$3.21 billion |
66% |
Data source: NVIDIA. YOY = year over year. *OEM and IP = original equipment manufacturer and intellectual property.
Crypto revenue is expected to plunge to roughly $100 million in Q2
From CFO Colette Kress' remarks:
Cryptocurrency demand was, again, stronger than expected, but we were able to fulfill most [emphasis mine] of it with crypto-specific GPUs, which are included in our OEM business at $289 million. As a result, we could protect the vast majority of our limited gaming GPU supply for use by gamers. Looking into Q2, we expect crypto-specific revenue to be about one-third of its Q1 level. [emphasis mine]
The $289 million in sales of application-specific boards to the crypto market accounted for 9% of NVIDIA's total first-quarter revenue of $3.21 billion. However, the total revenue derived from this market was greater than $289 million. Some miners buy the company's GeForce gaming GPUs, rather than its application-specific product, so these sales would fall into gaming -- and NVIDIA can't accurately quantify these. The bottom line is that sales to the crypto market are not insignificant. (If management is correct that the company was able to fulfill "most" of the crypto demand with application-specific GPUs, it's probably safe to ballpark total crypto sales as accounting for 11% to 14% of total revenue.)
As background, GPUs have become the hardware of choice for "mining" Ethereum, which is the second-largest crypto by market cap behind bitcoin, and some other newer digital currencies. So NVIDIA and its discrete GPU rival, Advanced Micro Devices, or AMD, have been getting a sales boost. These boosts became much bigger last year, thanks to the soaring prices of cryptocurrencies. Crypto prices peaked late last year and have cooled off considerably, so it's not a surprise that NVIDIA expects sales to this market to sharply fall off beginning in the second quarter.
Retail prices for gaming GPUs are "starting to normalize"
From CEO Jensen Huang's remarks:
Crypto miners bought a lot of our [GeForce gaming] GPUs during the quarter and it drove prices up. ... We monitor spot pricing every single day around the world. The prices are starting to normalize.
Normalizing retail prices for gaming GPUs is good news, as it will allow gamers who have been priced out of the market to get their hands on a new GeForce graphics card at a more reasonable price. NVIDIA establishes a manufacturer's suggested retail prices (MSRPs) for these products, but it doesn't set retail prices -- and retailers have jacked up GeForce prices considerably due to the added demand from crypto miners.
Tying it all together
Investors focused on the long term shouldn't give much credence to the bear thesis centered on cryptocurrency. The first main part of this argument is straightforward: NVIDIA will lose a substantial amount of revenue due to the plunge in crypto prices relative to late last year, which will also adversely affect its profits. Granted, NVIDIA is poised to lose a solid amount of crypto-related revenue, but this is a company that is growing revenue and earnings at a torrid pace. So any negative "crypto effect" should prove a relatively short-term, at worse intermediate-term, bump in the road.
The second main piece of the bear thesis is that the dynamics in the crypto sector will result in a flood of used graphics cards hitting the market, as many who bought GeForces to use for crypto mining will dump them. While it's true that there could be a good number of these cards hitting the market, it seems to me that any resultant dampening of demand for NVIDIA's new GeForces won't be long lived. The gaming market is very healthy -- "super healthy" according to Huang -- thanks to growth drivers like esports and the Battle Royale genre, and should be able to more than compensate for such an impact over time.
