Nvidia's Crypto Concerns Are Cancelled, Gaming To Reign Supreme

seekingalpha2021-06-15

Summary Nvidia's massive FQ2 guidance raise brings bears (back) to the crypto talking point. But if they move to crypto, they admit RTX 3000 series cards have been selling in droves - negating any ...

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followLin
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2021-06-16
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2021-06-16
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2021-06-15
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2021-06-15
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But the guide was even more out of this world, showing analysts they're way off base in their models. This is causing the bears to move from one argument to another as each gets debunked through raw financial numbers. But now they're walking into a crypto debate where the bulls have more transparency and data on their side than any other time. Unfortunately, the crypto bear thesis is not the one to take this time around. Gaming revenue growth will not slow as there's a huge RTX 3000 series opportunity with less than 4% of the GPU market share, just as supply receives a much-needed reprieve with crypto migrating to a new SKU altogether. The market appreciates the mitigated risk with crypto revenue transparency, allowing the stock to sustain a premium valuation.\nPaper Launch, Remember?\nAt first, the bears postulated the RTX 3000 series debut was a paper launch because there was such limited supply. Gamers across the internet were up in arms because so few cards could be bought, sold out everywhere. Limited supply has continued to plague the 3000 series since then.\nBut Gaming revenue has gone from $1.65B before the RTX 3000 launch to $2.76B in the latest quarter, causing this bear talking point to fade over the last several months.\nIf the 3000 cards were so limited in supply, what accounts for the consistent monstrous quarter-over-quarter growth in the Gaming division?\nAh, I'm glad you asked.\nIt's clearly the selling of more than just a few (paper) RTX 3000 cards.\nCrypto Is The Talking Point, Again\nThat question brings us to the latest bear talking point - crypto. If the bears move to this point, they have given up on the paper launch argument. That's because to mine crypto, you need a powerful GPU, and that powerful GPU is an RTX 3000 series card. So either there are very few 3000 series being sold (paper launch) - which doesn't allow a crypto bubble to be an issue - or there are indeed enough 3000 cards to meaningfully show up on the top line and debate how much is due to crypto-related sales.\nBut the crypto debate is much harder to prove for either side. Historically it has been a bit of a closed box in terms of what cards have been sold to crypto miners and which ones have gotten into \"real\" gamers' hands. The bears can point to this and say that whatever RTX 3000 series cards have been sold over the last several months were for crypto mining.\nAnd you might be wondering, \"Why is this a big deal? Revenue is revenue, regardless of who's buying the card.\"\nThis might be true if it wasn't for the volatile nature of the cryptocurrency world. Mining crypto is a profitability equation of how high the hash rate of a processor is (how fast it can complete the crypto calculations on the blockchain to receive a reward) and how much that particular crypto is worth on the market. The higher the crypto price, the higher the incentive to mine (the reward is bigger in pure dollar terms).\nBut in 2018, after the \"crypto bubble\" deflated when the price of Bitcoin (BTC-USD) and Ethereum (ETH-USD) plummeted 85% from then all-time highs, Nvidia's revenue took a hit. Suddenly the cards of 2018 were not profitable to mine at depressed prices. It appeared a lot of the Gaming division sales were tied to crypto, or at least enough to knock growth off-kilter. As a result, the company experienced negative top-line growth throughout the following year.\nThis is why the word crypto spoken by management, along with the crypto volatility with Bitcoin and Ethereum 50% off the latest all-time highs, brings a shiver down the market's spine.\nIt sees 2018 playing out all over again.\nFacing The Crypto Thesis Head On\nHowever, bulls have more data over the last two quarters than they did in the 2018 crypt bust, with the strongest talking point to date coming just a few weeks ago. That point is the new RTX 3000 SKUs which will physically limit the hash rate of the cards, deterring miners from buying cards and opening up supply to gamers for typical GPU use.\nBut if crypto is a major part of Gaming division revenue and the company is going to hardware limit the hash rates to make them unprofitable to mine crypto, future Gaming revenue will undoubtedly suffer.\nRight?\nApparently not; guidance isn't telling us that story. With the current quarter running from May through July and the new \"hash lite\" RTX cards shipping at the end of May, guidance was still $6.3B in revenue versus The Street consensus of $5.48B.\nThe hidden gem in the guide was the additional data bulls have needed for some time: a breakdown of revenue from CMPs (crypto mining processors). The company created CMPs to serve the industrial crypto mining community to provide better performance (by focusing processing power specifically on hashing and removing graphic rendering capabilities) and separate the supply between miners and gamers. This works to benefit investors as this breakdown of revenue allows for better risk analysis of overall revenue.\nAnd that is the key to the crypto cycle this time around.\nThe guide for FQ2 included $400M of revenue for CMP products (as shown under the OEM/Other category). You might see this as a huge risk (relative to overall revenue), but this has now made the risk a solid number. Before this CMP breakdown, the market and analysts had to rely on rough estimates based in wide ranges to understand how much the Gaming division had downside risk built into it due to crypto.\nWhy has the market responded positively to the expected 158% quarter-over-quarter growth, which follows 114% sequential growth in the just reported quarter for CMP? Because the market can assess the risk to the downside now - uncertainty has been mitigated.\nData byYCharts\nThe market knows $400M is the mark now. The rest of the divisions are more understood, and channel checks are more accurate there. The question mark has been crypto, and the company is now being the most transparent about it.\nOutlook For Gaming\nThis then begs the question: how much will be cannibalized from the Gaming division?\nNot much if we continue doing the math on the FQ2 guide. After backing out the $400M of CMP sales, we're left with a guide of $5.9B. That's still $420M of outperformance analysts didn't account for, while the Gaming division will technically see two \"hits\" to its growth, each for the same reason. Not only is there a separate product line for crypto, but the RTX cards will also have their inherent mining performance throttled. This should provide no reason to continue using RTX cards as the best value for mining (relatively cheap compared to ASICs with still profitable processing power).\nOf course, not all of the $420M guidance raise is for Gaming. Still, considering it's the largest division with 48% of revenue in the last quarter, it stands that analysts will meaningfully raise estimates for the Gaming division.\nBut then, where's the Gaming growth coming from in the quarters ahead?\nGamers will be the clear demand driver now. Supply should now make its way toward the gamers who have been trying to get a 3000 series card for the last eight months. You don't have to Google very much to find folks still patiently - and impatiently - waiting for their 3000 series card.\nThere's a huge runway for upgrades from prior RTX cards and GTX cards as the market penetration of RTX 30XX cards is still less than 4%, around 3.64%, according to Steam's monthly hardware survey. And that's growing each month since January across the SKU board. This compares to the current gamer market share of all other Nvidia cards of 68.6%.\n(Source:Steam Hardware Survey)\nAnd if you're concerned about the lack of upgrades from RTX 20XX cards since they're only one generation behind, the non-RTX portion of the market makes up 55.11%. So there's a huge greenfield for upgrades to the 3000 series ahead with supply opening up to the real gamers.\nOutperformance To Continue\nManagement has been tackling the market's concerns head-on, contrary to 2018. It has been able to capitalize on a strained crypto market because its GPU-based CMP processors are above and beyond anything anyone has ever produced. This time it did it correctly with much better transparency - the market appreciates the calculated risk.\nThere's still further bullishness as Nvidia enters a crypto market dominated by ASICs, which tend to have very limited supply and very long lead times. Nvidia is capitalizing on the market using its larger contract position with fabs like Taiwan Semiconductor (TSM) and Samsung (OTC:SSNLF)(OTC:SSNNF) to produce competitive mining processors.\nEventually, the transition of Ethereum (ETH-USD) to proof-of-stake from proof-of-work may serve as a headwind rather than a tailwind. Still, this risk is much further out as not only will the transition start in early 2022, but miners are expected to remain on the network for at least a year after the transition.\nIt comes down to this: if the market has the data it needs to calculate the at-risk revenue easily, the market won't be as skittish to value Nvidia at the multiples it has grown to. Add in the huge upside to revenue for FQ2 with gamers now able to dive into the consumer market more fully, and you have a continuation for the Gaming division to outperform through at least year-end, if not well into 2022. For a long-term shareholder, there are further returns ahead for the stock.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":163138933,"gmtCreate":1623861798822,"gmtModify":1634026816498,"author":{"id":"3575020553550859","authorId":"3575020553550859","authorIdStr":"3575020553550859","name":"followLin","avatar":"https://static.tigerbbs.com/bbaec46df441ece98a67c86b2f261213","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3575020553550859"},"htmlText":"👍🏻👍🏻👍🏻👍🏻👍🏻","listText":"👍🏻👍🏻👍🏻👍🏻👍🏻","text":"👍🏻👍🏻👍🏻👍🏻👍🏻","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/163138933","repostId":1130157766,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":169804487,"gmtCreate":1623825431549,"gmtModify":1631893585293,"author":{"id":"3574284389004367","authorId":"3574284389004367","authorIdStr":"3574284389004367","name":"fffelicia","avatar":"https://static.tigerbbs.com/8189d5ede55254fca44a27f0a256a0a2","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3574284389004367"},"htmlText":"wow","listText":"wow","text":"wow","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/169804487","repostId":1130157766,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":160676010,"gmtCreate":1623798213730,"gmtModify":1634028193528,"author":{"id":"3586568139133942","authorId":"3586568139133942","authorIdStr":"3586568139133942","name":"Bren1205","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3586568139133942"},"htmlText":"&nbsp;👍🏼","listText":"&nbsp;👍🏼","text":"👍🏼","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/160676010","repostId":1130157766,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":160327220,"gmtCreate":1623773216760,"gmtModify":1634028461709,"author":{"id":"3579308487588351","authorId":"3579308487588351","authorIdStr":"3579308487588351","name":"RaymondSCF","avatar":"https://static.tigerbbs.com/d225800cc8cdaedb46d9cee9c44af062","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3579308487588351"},"htmlText":"👍👍👍","listText":"👍👍👍","text":"👍👍👍","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/160327220","repostId":1130157766,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":187530878,"gmtCreate":1623758056094,"gmtModify":1634028897360,"author":{"id":"3572864464954492","authorId":"3572864464954492","authorIdStr":"3572864464954492","name":"Nick26","avatar":"https://static.tigerbbs.com/d74d90e053272b31be39ad141117de79","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3572864464954492"},"htmlText":"[微笑]&nbsp;","listText":"[微笑]&nbsp;","text":"[微笑]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/187530878","repostId":1130157766,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":187242425,"gmtCreate":1623756899667,"gmtModify":1634028925642,"author":{"id":"3578386735008858","authorId":"3578386735008858","authorIdStr":"3578386735008858","name":"Junfant","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3578386735008858"},"htmlText":"Nice","listText":"Nice","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/187242425","repostId":1130157766,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":44,"commentSize":28,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; 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