What happened

Semiconductor developer NVIDIA (NVDA 1.87%) posted strong fourth-quarter results last night with a side of optimistic guidance for the next reporting period. The stock fell as much as 8.5% on Thursday anyhow, because sometimes even an analyst-stumping report isn't quite enough to support a skyrocketing stock like NVIDIA's.

So what

In the fourth quarter of 2020, NVIDIA's top-line revenue rose 62% year over year to $5 billion. Adjusted earnings climbed 64% higher, landing at $3.10 per diluted share. Your average analyst would have settled for earnings near $2.81 per share on sales in the neighborhood of $4.82 billion. The stellar results were driven by high demand for NVIDIA's data center processors and gaming products.

Heading into the report, NVIDIA's shares had gained 112% in 52 weeks. The stock traded at a nosebleed-inducing 95 times trailing earnings and 86 times free cash flow, setting the stage for a significant price cut despite a strong earnings report. Today, you can pick up NVIDIA's shares for the somewhat less exorbitant valuation ratios of 93 times adjusted earnings or 71 times free cash flow.

A rendering of the Nvidia logo as an embossment on a green material.

Image source: NVIDIA.

Now what

Some investors also worry about artificial growth stemming from rising cryptocurrency prices. Specifically, NVIDIA's graphics processors are very efficient at mining Ethereum (ETH -2.17%) tokens and the smart-contract cryptocurrency has seen prices skyrocket 568% over the last year. If Ethereum miners are buying tons of NVIDIA's graphics cards, that leaves fewer units on store shelves for actual gamers. All of this is happening during a marketwide shortage of semiconductor manufacturing capacity, limiting the processor supplies even further. All of this sounds like good news for NVIDIA, but the idea is that it also exposes the company to significant market risks if Ethereum prices crash again, killing the demand for token-mining hardware.

NVIDIA's management has acknowledged this concern and taken steps to limit the Ethereum-mining appeal of its gaming hardware. Furthermore, CEO Jensen Huang argues that the cryptocurrency mining market is a fairly small part of his company's end-user market. Hyper-specialized application-specific integrated circuits (ASICs) play a much larger role in the crypto-mining sector.

"I think that this is going to be a part of our business. It won't grow extremely large no matter what happens and the reason for that is because when it starts to grow large, more ASICs come to the market, which kinds of mutes it," Huang said on the fourth-quarter earnings call. "When the market becomes smaller, it's harder for ASICs to sustain the R&D and so the spot miners, industrial miners come back and then we'll create [cryptocurrency mining processors]. And so we expect it to be a small part of our business as we go forward. "

The company can't track how people end up using the chips it sells, but Huang estimates that roughly $200 million of this quarter's gaming product sales came from mining enthusiasts. That's just 8% of a $2.5 billion top-line haul.

All of this is to say that NVIDIA's post-earnings correction may have been amplified by the Ethereum mining risk, and that particular threat doesn't look all that menacing. Therefore, you could make a case that NVIDIA's shares are selling at a discount today -- despite the sky-high valuation ratios.