Should Nvidia Investors Be Worried About Crypto Crash?

While the broader market is having a tough year, crypto investors are having it even worse. With two staples in the cryptocurrency market, Bitcoin and Ethereumeach down around 65% from their all-time highs set in November, it has been difficult for anyone invested in crypto.

However, this market weakness has had a larger ripple effect. Crypto miners are not nearly as profitable, and many shut down their rigs due to high input costs (electricity). If miners shut down existing resources, they certainly don’t buy new graphics processing units (GPUs) to increase capacity.

This spending drop is where the GPU market leader, Nvidia (NVDA 1.98%), enters. Nvidia makes GPUs for several purposes: gaming (the same devices used to mine crypto), data centers, and self-driving cars. But with the drop in demand for crypto, investors are worried about the potential revenue the company will see.

While this is a valid concern, I think investors need to dig deeper to truly understand why Nvidia will be able to shrug off this headwind.

2018 retrospective

Part of the reason investors are worried about Nvidia is that this isn’t the first time a crypto crash has happened. In the last quarter of 2017, Bitcoin prices practically quadrupled and then crashed, and the crypto lost half its value in the next quarter.

This story reflects the rise and fall Bitcoin investors have experienced over the past year. But how was Nvidia affected?

Because the company got caught up in the crypto-mining euphoria, it ordered too many GPUs and had an oversupply. As a result, Nvidia had to cut prices, causing revenue to drop.

NVDA Revenue Data (TTM) by YCharts.

Digging a little deeper, before the crash in the third quarter of fiscal 2019 (ended October 28, 2018), Nvidia’s revenue breakdown looked like this:

Source: Nvidia.

Overdependence on one division can spell disaster for a company if that division faces serious headwinds. In the next quarter, gaming revenue fell to $954 million, down 45% year-over-year (YOY) and 46% quarter-over-quarter.

However, Nvidia isn’t the one-trick pony it used to be.

Nvidia is more diversified now

Fast forward to today’s values ​​and Nvidia is much more balanced. During Q1 of FY 2023, Nvidia’s revenue breakdown looked like this:

Source: Nvidia.

Due to its data center division’s rapid growth (up 373% since Q3 FY19), Nvidia has another revenue stream to lean on if gaming takes a hit. Additionally, this segment has huge tailwinds, as all major data center vendors use their product. Management is guiding for 70% YOY growth for this segment in Q2, which will help drive the overall guidance of 25% growth.

Part of the reason for the low guidance is management’s lack of visibility in the crypto space. Because these GPUs can be used for multiple purposes, it will not know how much the vaporization of the crypto demand affected the results. As a result, management was likely conservative with its projection.

Still, 25% growth might not cut it for a company trading at 49 times earnings. But considering forward earnings (which use estimates), Nvidia trades for a much more reasonable 34 times earnings.

Investors will learn more about Nvidia’s current state during its Q2 conference call on August 24. But with the stock down about 45% from its all-time high, any glimmer of good news is likely to be a positive catalyst for the stock. As a result, I think Nvidia is a solid buy here, as the long-term tailwinds are still blowing in favor of the data center division.