Nvidia Stock: High Crypto-Mining Exposure Makes It A Sell (NASDAQ:NVDA)


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Nvidia Corporation (NASDAQ: NVDA) Dominance in the high-end GPU markets over the past half-decade is unquestionable, but its golden age seems to have stalled with Ethereum’s anticipated shift from Proof of Work to Proof of Stake. Proof of The job allows individuals to mine using GPUs and requires great computing power. The new system is Proof of Stake, which follows a mechanism for processing transactions and creating new blocks within a blockchain without the need for complex calculations. The change will eliminate the need to buy GPUs for cryptographic mining. We believe that Nvidia’s management has underestimated its exposure to GPU sales in the cryptocurrency mining market.

We believe that Nvidia is a sale with the firm conviction that the company will not be able to keep up with its high valuation. The recent 2022 Investor Day Presentation describes a Total Addressable Market (TAM) narrative that predicts an increase in revenue. Our numbers show that this TAM narrative is unlikely, at best. We estimate that the move from Ethereum to Proof of Stake is likely to affect Nvidia by a minimum of $ 500 million and up to $ 1 billion in revenue. Therefore, we believe that Nvidia shares are at risk of a significant sale before market prices in the new market reality.

Nvidia chipset

Nvidia

What Nvidia (doesn’t) tell you

The US-based semi-giant has maintained its leadership in the manufacture and design of computer graphics processors that operate through Graphics Processing Units (“GPUs”). Like most semi-finished products, GPUs are an essential part of our lives, whether through computers, Playstation5 graphics, or mining Ethereum in a blockchain. In fact, Nvidia has a number of end markets in which it operates: gaming (45%), data centers (41%), professional display (8%), automotive (2%), and original equipment maker (3%).

Innovation and technology in all of these industries have established a name for Nvidia, even more so now with the Omniverse, the Hooper Data Center GPU, and the Grace ARM-based CPU. However, the company’s next expected withdrawal of shares is not a result of technological shortcomings, but its lack of transparency with investors about its exposure to cryptocurrency demand.

The growth described in GTC 2022 is based on outdated end-market demand and does well to tiptoe Nvidia’s issue with cryptographic mining. Nvidia’s earnings performance for the past 12 quarters does not mention its exposure to GPU sales related to cryptographic mining. We believe that investors underestimate Nvidia’s exposure to crypto mining at its own risk.

The link between Nvidia and Crypto mining is well established

The connection between Nvidia and cryptographic mining is no secret. The only way to extract Ethereum was through GPUs, and the best GPUs are from Nvidia. The two have been married in their rise and fall since 2017. So much so that the fall in the hash rate of Ethereum 2018 correlates with a fall in NVDA shares for fiscal year 2019. We saw it again last year (2021 ), when the decline in cryptocurrency-related sales affected Nvidia’s shares earlier this year, causing a 27% drop in January 2022.

Nvidia has fallen back into the same position and we know the secret of what lies ahead. The following graphs illustrate how the price of Nvidia shares correlates with the price of Ethereum.

Nvidia and Ethereum correlation

MacroAxis

Stock performance

Nvidia shares are another favorite of the pandemic. We have seen 223% share growth since the start of the pandemic in March 2020. Specifically, NVDA shares have increased 122% in 2020, 125% in 2021, and over the previous year, shares have fallen by 26 %. We don’t think the stock decline is even done, as the expected revenue declines due to the Crypto Mining decline are priceless. Therefore, we expect another drop in current stock levels. The following chart illustrates Nvidia’s performance over the past two years.

YTD stock performance

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Nvidia 2021 performance

Graphics Y

Nvidia 2020 stock performance

Graphics Y

Valuation

Nvidia is highly valued. The stock is currently trading at about $ 218 per share. Nvidia is relatively expensive, trading at 15.3x EV / C2022 sales compared to the 5.1x peer group average. According to the P / E, it is trading at $ 39.4x C2022 EPS at $ 5.53, compared to the group’s average of 17.4x.

Although it adjusts to growth, we believe Nvidia is expensive. On a growth-adjusted basis, Nvidia is trading at 0.7 times. We believe that revenue and EPS estimates are at risk due to the impending slowdown in the cryptocurrency mining market. We believe that NVDA’s rating is too high given the imminent decline in demand for cryptographic mining and the negative shift in demand signals from equipment manufacturers, consumers and communications. The following graph illustrates Nvidia’s peer group valuation.

Valuation table

Refinitive

Word on Wall Street

The market consensus drives a strong stock purchase of Nvidia, which accounts for 81% of sales valuations, with the rest being neutral / hold stock valuations. The overwhelming buying consensus is a natural result of investor confidence after Nvidia’s GTC. Nvidia’s average target price is $ 338, while the average is $ 350.

We don’t believe the sales side is fixing prices on slowing demand in the crypto mining business. We think there are more disadvantages in stocks than the market is pricing. The following chart illustrates sales side valuations, pricing targets, and upside potential.

Sales valuations and price targets

Refinitive

What to do with the stock

We encourage investors to sell NVDA at its current levels. Demand for cryptographic mining GPUs and the pandemic have increased revenue previously, but both are expected to no longer be factors in 2H22. We expect a sharp decline, which seems inevitable, especially since Nvidia is not yet ready to admit its exposure to the demand for cryptographic mining.



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