News & Analysis

NVIDIA: The multi-billion-dollar tale of dystopian science fiction and Chinese crypto miners

Andrew Saks, Thursday, 15 July 2021

NVIDIA is an interesting company. Unlike the relative newcomers that now dominate the US stock markets such as Apple, Tesla and Amazon, NVIDIA has its roots in the good old pre-Y2K computer hardware industry.

For those who are too young and dynamic to have ever needed to know what an ATX mainboard or an ATI Certified graphics card is, that is the bygone age during which NVIDIA cut its teeth.

Now, 28 years after its establishment, the company is a US big cap stock, the company having a $487 billion market capitalization.

That is quite simply massive.

Listed on the NASDAQ exchange, NVIDIA has been building a gradual upward trend over the past few months, and over a six month period has shown strong growth to the point that it is up 51.99%.

Today, however, analysts on both sides of the Atlantic are beginning to look closely at where this direction is now heading, as the company's stock suddenly began to tail off after the opening of the US market this morning.

NVIDIA stock is now down 11.94 points, whic is 1.52%. That may not seem like very much, but with massive, stable and well capitalized giants such as NVIDIA, this is noticeable when studying the charts, and has become a subject of discussion today.

One aspect to consider is that unlike the purely software based 'big tech' companies that dominate the US stock market, NVIDIA is first and foremost a hardware manufacturer, and is known for being one of the world's largest providers of graphics cards.

The company has been a big name since the introduction of its Ge-Force range in the late 1990s, however we live in a different world today; a world that is far less hardware dependent in which cloud-based computing models dominate, and in which the subscription model is part of everyone's life.

Why, in that case, is NVIDIA still right up there with the huge, well capitalized companies? Well, there are two reasons, the first being the gaming sector, which requires highly advanced graphics cards, and the second being the cryptocurrency mining fraternity, which have been dependent on graphics cards ever since the first Bitcoin made its way into cyberspace over 11 years ago.

Most mining rigs, some of which are absolutely enormous and are part of industrial-scale cryptocurrency mining enterprises, are based in China and have had a huge advantage over mining efforts outside the communist country's jurisdiction in that many of them have been benefitting from cheap, and in some cases free electricity.

The power consumption required to mine cryptocurrency - and in particular Bitcoin - via graphics cards is substantial and therefore has been an entry barrier to cryptocurrency mining in Western countries where the power cost is so large that it often renders cryptocurrency mining futile, however with that cost not part of the equation in China, massive profits have been made by Chinese miners.

Last month, however, the Chinese government inevitably demonstrated that it has finally had enough of these massive companies exploiting free and cheap state-provided power in order to participate in 'mining' a series of decentralized global cryptocurrencies that would enable the miners and the subsequent users of the mined digital assets to circumvent the Chinese government's communist policies including capital controls, and to be outside the all-seeing-eye of the state.

Participating in free market activity such as this is very much frowned upon by the communist government, so as was clearly going to happen at some point, the government leapt into action and banned huge swathes of cryptocurrency mining activity across China, meaning that the demand for graphics cards which are used for mining operations has tanked.

Some Chinese cryptocurrency miners in China are offloading their powerful graphics cards into the second-hand market, and some, afraid of the government, have been dumping their mining facilities altogether and calling it a day.

NVIDIA's RTX 3070 GPU is reportedly being sold for just over $400 in China. That's lower than the card's $499 new retail price.

In other parts of the world such as Britain and North America, marketplaces such as eBay are awash with second-hand graphics cards at knockdown prices, and in some regions, notably Germany, graphics card prices have fallen at the rate of an iron girder being thrown from a precipice.

The price premium of NVIDIA's RTX 30 series cards has come down to 153% of the manufacturer's suggested brand new retail price in the first week of July, compared to a demand-driven 304% in the middle of May on the German market.

NVIDIA may well be experiencing this sudden lack of demand for a product that was in high demand for years, but it is important to remember that NVIDIA has weathered more than one storm and did not get where it is today by simply giving up when its popular product reaches a hurdle.

It is a very capital-light, highly scalable business, and has consistently delivered high sales, quite often around the almost unbelievable 70% margins, and rising shareholder returns. Just two years ago NVIDIA returned a whopping £150 million to shareholders in dividends and buybacks. That is enough to demonstrate confidence.

The video gaming industry is still relatively buoyant, and whilst it does not require graphics cards to be bought in huge bulk in the way that the Chinese crypto mining stalwarts have done, largely because the crypto miners are industrial scale leviathans and the gamers are retail customers buying one expensive graphics card once every few years, it is still a large segment and has been helped by the lockdowns which have caused many people to occupy themselves at home.

Of course, there are a lot of us who think gaming is not an edifying use of time, but there are also a lot of people who do not.

Anyone who has watched the 2006 American dystopian science fiction comedy film Idiocracy will have had an amusing glimpse into the hedonistic, non-considered 'lifestyle' of computer games and high calorie instant ready meals propagated by Clevon and his fictitious successors.

Yes, that was satire, and amusing satire at that, but the idea had to come from somewhere, and producers Mike Judge and his Israeli colleague Etan Cohen would have seen the cartoons of the early 1990s during their post-college years featuring satirical observations of Western teenage culture.

Indeed, it was Mike Judge himself who wrote Beavis and Butthead, a pair of teenage slackers characterized by their apathy, lack of intelligence, lowbrow humor, and addiction to, you've guessed it, high calorie instant meals and computer games.

Whilst the Generation X intellectuals tut and shake their heads, NVIDIA remains an interesting company with a very interesting stock market presence.

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