NVIDIA (NVDA 0.10%) has sizzled on the stock market since the beginning of 2019. Shares of the graphics specialist have jumped about 500% in just over two and a half years thanks to terrific growth in the video gaming and data center businesses.
However, ominous signs are emerging in NVIDIA's biggest business, video gaming, that could give investors déjà vu, harkening back to a regrettable period in the company's history.
Graphics card prices are coming down as miners start dumping GPUs
Graphics processing unit (GPU) prices have started pulling back from their astronomical highs of late due to several factors. However, lower demand from cryptocurrency miners seems to be the biggest growth driver behind the correction. That's not surprising, as miners reportedly bought a fourth of the total graphics cards sold in the first quarter of 2021 to mine cryptocurrencies, according to Jon Peddie Research.
But a drop in the price of Ethereum (ETH +1.99%) and China's crackdown on Bitcoin (BTC +2.02%) have hamstrung the demand for graphics cards used for mining operations. Etherscan, an Ethereum analytics platform, recently pointed out that the GPU power used for mining the cryptocurrency has dropped 19% in the past month. As a result, cryptocurrency miners in China are offloading their powerful graphics cards into the second-hand market, according to a report by PC Gamer.
NVIDIA's RTX 3070 GPU is reportedly being sold for just over $400 in China. That's lower than the card's $499 sticker price. It is also worth noting that the RTX 3070 was being sold for $1,300 in the first half of June, according to eBay price data collected by Tom's Hardware. As of the end of the first week of July, the card's price had come down to just over $1,080.
GPU prices in Germany have also dropped at a breakneck pace. The price premium of NVIDIA's RTX 30 series cards has come down to 153% of the manufacturer's suggested retail price (MSRP) in the first week of July, compared to a whopping 304% in the middle of May, according to a third-party report.
Image source: Getty Images.
NVIDIA has been hit hard in the past
NVIDIA was hurt big time by a GPU price crash back in 2018 once cryptocurrency miners decided to offload their graphics cards in the preowned market. The excess graphics card inventory in the wake of the cryptocurrency mining bust burnt investors as NVIDIA's fortunes declined.
The recent price correction indicates history may repeat itself and wreck NVIDIA's momentum. After all, the chipmaker's revenue in the fourth quarter of fiscal 2019 for the three months ending Jan. 27, 2019, sunk 24% year over year in the aftermath of the cryptocurrency mining bust. It took the company a year to recover from that shock. NVIDIA's revenue in fiscal 2020 dipped 7% before it regained its mojo thanks to strong demand from the video gaming and the data center segments.
However, long-term investors have no reason to worry, despite these developments that have caused NVIDIA pain in the past. That's because the demand for its latest cards is so strong that NVIDIA has reportedly decided to cut production of the old-generation RTX 2060 graphics card in half to increase the supply of the RTX 30 series cards. Additionally, reports indicate that NVIDIA is already working to increase the production of the aggressively priced RTX 3060 card to meet strong demand.
So, even if gaming enthusiasts decide to buy a preowned graphics card from miners -- which isn't always a good idea as they may have been subjected to long hours of operation and could be prone to wearing out faster -- NVIDIA will still have enough end-market demand to fill.
Consider this: Only 15% of NVIDIA's installed graphics card user base of 140 million is running the RTX series cards. A short-term disturbance in the GPU market's demand-supply dynamics is unlikely to change the long-term picture. Jon Peddie Research estimates that discrete GPU sales could generate $54 billion in revenue by 2025, a sharp jump from last year's revenue of $23.6 billion thanks to the growth in video gaming. NVIDIA controls 80% of this market.
Savvy investors would do well to consider buying more NVIDIA stock if the cryptocurrency bust sends its shares packing. After all, analysts expect NVIDIA's earnings to grow at more than 26% a year for the next five years, suggesting this is a top growth stock that's worth buying on its rare dips.
