Nvidia's (NVDA -3.87%) graphics cards are good at the type of number-crunching necessary to mine a variety of cryptocurrencies. While this demand from miners has boosted sales, it's difficult to tell exactly how much.
Nvidia got into trouble with the SEC for its behavior back in 2017-2018, the last time cryptocurrency prices entered bubble territory. The SEC charged the company with failing to provide adequate disclosures related to the impact of cryptocurrency mining on its gaming business. Nvidia agreed to pay a $5.5 million penalty this month to settle those charges.
The ongoing cryptocurrency bubble is much bigger, and it's just as hard to tell how much of an impact it's having on Nvidia's revenue. While the company has plenty of growth opportunities beyond cryptocurrency mining, investors should be prepared for a negative surprise.
Difficult to estimate
Nvidia sells graphics cards that are explicitly aimed at cryptocurrency miners, but these represent only a portion of cryptocurrency-related sales. The problem Nvidia faces is that a cryptocurrency miner can buy gaming graphics cards through online retailers or any other standard channel. It thus becomes difficult to parse how much demand is coming from gamers, and how much is coming from miners.
Nvidia doesn't attempt to make an estimate. In its 10-K, the company states: "It is difficult for us to estimate with any reasonable degree of precision the past or current impact of cryptocurrency mining, or forecast the future impact of cryptocurrency mining, on demand for our products."
If the last cryptocurrency bubble is any indication, the demand from mining is significant. When the 2018 bubble burst, demand from miners evaporated, leading to excess channel inventory of Nvidia's gaming graphics cards. Presumably, Nvidia will be better prepared this time around, but it's hard to know whether the company learned its lesson.
Chart by author. Data source: NVIDIA.
In the preceding chart, the big dip in gaming revenue in the fourth quarter of fiscal 2019 was when demand from cryptocurrency miners vanished. Too much channel inventory depressed Nvidia's gaming sales for a few quarters, and the stock fell off a cliff.
This time around, the pandemic is a complicating factor. Demand from gamers really did rise as the pandemic kept people at home, and that explains a portion of the dramatic increase in gaming sales starting in Nvidia's fiscal 2021. Cryptocurrency prices began to rocket higher around the same time, providing a second source of increased demand.
We won't know how much of Nvidia's success in the past couple of years was due to cryptocurrency until the bubble fully bursts.
Beyond gaming
The good news for Nvidia investors is that the company's data center segment is not dependent on cryptocurrency demand. Nvidia's graphics cards are useful for accelerating all sorts of data center workloads, including artificial intelligence. This has enabled Nvidia to build a multibillion-dollar business outside of its core gaming market.
The data center segment produced $3.26 billion of revenue in Nvidia's latest quarter, nearly as big as the gaming segment. As long as demand from cloud computing providers and other data center customers holds up, Nvidia can at least partially offset any declines in the gaming business with growth in the data center business.
Nvidia is scheduled to report its fiscal 2023 first-quarter results on May 25. Graphics card prices have been falling rapidly as demand from miners dries up. This could trigger gamers who have been on the sidelines to finally upgrade, but that may be a short-lived boost. We'll know more when Nvidia shares its results and outlook later this month.
