Black swan occasions and thesis
Lately, Eric Robertsen, the top of analysis at Customary Chartered Financial institution, made an inventory of some black swan occasions that might occur in 2023. High on the record is the chance for Bitcoin (BTC-USD) costs to drop by one other 70% to round $5000. And on the similar time, gold costs would rise by about 30% (and full disclosure, I don’t have Bitcoin publicity however I’ve some gold publicity). His causes are quoted under, and I view them as fairly believable:
Eric Robertsen acknowledged within the be aware that, contemplating quite a few components like inadequate funds or bankruptcies leading to extra crypto service suppliers packing up, extra traders will seemingly start to develop chilly toes and can proceed to withdraw their belongings. This, he mentioned, will almost definitely result in traders’ consideration being directed to the great outdated gold. Robertson predicted that the worth of gold might rise to about $2,250 for an oz., which is a couple of 30% enhance.
The remainder of this text focuses on the impacts of such a black swan occasion on Nvidia (NASDAQ:NVDA). Black Swan occasions, by definition, are troublesome or unimaginable to foretell however generate sequential occasions, which I believe is strictly what NVDA is dealing with right here when it comes to its Bitcoin publicity.
NVDA used to report its publicity to crypto mining. But it surely has stopped reporting it just lately. Administration repeatedly emphasised that crypto mining doesn’t generate a major impression on NVDA anymore in its earnings studies in current quarters, whereas on the similar time, they acknowledge that a wide range of mechanisms exist for potential impression. The next trade taken from its 2022 Q3 earnings report offers an excellent instance. The quotes are barely edited with emphasis added by me.
Query from Joseph Moore from Morgan Stanley: Surprise in the event you might discuss to trying backward on the crypto impression. Clearly, that is gone out of your numbers now, however do you see any potential for liquidation of GPUs which are within the mining community, any impression going ahead? And do you foresee blockchain being an vital a part of your online business sooner or later down the highway?
Solutions from Jensen Huang (CEO of NVDA):We do not count on to see blockchain being an vital a part of our enterprise down the highway. There may be all the time a resell market. For those who take a look at any of the main resell websites, eBay, for instance, there are secondhand graphics playing cards on the market on a regular basis. And the explanation for that’s as a result of a 3090 that someone purchased in the present day, is upgraded to a 4090 or 3090 they purchased a few years in the past is upgraded to 4090 in the present day. That 3090 may very well be offered to someone and loved if offered on the proper value. And so, the quantity of — the provision of secondhand and used graphics playing cards has all the time been there. And the stock isn’t zero. And when the stock is bigger than ordinary, like all provide demand, it might seemingly drift lower cost and have an effect on the decrease finish of our market.
Admittedly, it’s troublesome to estimate the impression. However I’ll strive nonetheless within the the rest of this text. And my conclusion is that NVDA administration most likely underestimated the impression of a crypto crash. As you will notice subsequent, I’m nonetheless seeing giant crypto impacts on each the costs of NVDA (which displays psychological impression) and likewise the profitability of NVDA (which displays basic impression).
Historic perspective: the 2018 crypto crash
The final time we expertise an analogous cryptocurrency crash dates again to 2018, as displayed within the charts under. As you’ll be able to see from the highest panel, the Bitcoin USD costs dropped from ~$19k to ~$3.6k in about 1 12 months, translating into an annual decline of 81%. And in tandem, the YoY development charges of NVDA’s working income (on a quarterly foundation) turned from about +50% to -45%. At the moment, NVDA was nonetheless reporting its publicity to crypto mining. Particularly,
Quoting from NVDA’s own estimates: its crypto-related gross sales had been about $0.6B (about 5.7% of its $10.6B whole gross sales. Whereas different unbiased analysts (reminiscent of Mitch Steves at Business Insider) supplied a a lot greater estimate of $1.95 billion of income associated to crypto/blockchain (about 18.4% of its then total revenues) at the moment.
How about now?
As aforementioned, NVDA stopped offering breakdowns of its crypto-related revenues. However my view is that its administration continues to be underestimating the impression in the present day simply because it did in 2018, for a minimum of two causes as detailed subsequent.
First, the inventory costs of NVDA are nonetheless tightly correlated with Bitcoin costs. After all, correlation doesn’t reveal a causal relationship. And consequently, such correlation is finest interpreted as a psychological impression. However nonetheless, psychological impacts are equally vital as basic impacts in investing. To wit, so far since 2022, Bitcoin costs are going by way of an analogous correction because it did in 2028. As seen from the underside panel of the chart above, Bitcoin costs contracted from a peak of ~$65k on the finish of 2021 (within the November timeframe) to ~$17.1k now, about 1 years’ time once more. Such a decline interprets into an annual decline 74%, near the 81% decline seen within the 2018 episode. Within the meantime, you already know what has occurred to NVDA inventory value: it corrected by about 52% from its peak worth in a couple of 12 months in tandem.
The above correlated actions are additionally noticed over a wider time-frame as proven within the subsequent image under. This chart exhibits the correlation between Bitcoin value motion and NVDA value motion throughout the previous ten years since 2014. As seen, the common correlation is a optimistic 0.26 previously, and the present creation is a optimistic 0.183.
Second, the earnings of NVDA are additionally correlated positively with Bitcoin costs too. The following chart illustrates the correlation between Bitcoin costs and NVDA’s diluted EPS on a quarterly foundation. As you’ll be able to see, the common correlation is a good stronger 0.408 previously ten years. And at present, the correlation hovers round 0.757, a fairly robust stage.
However in fact, correlation does all the time equate to causality. Nonetheless, on this case, I believe there’s a good risk that it does. As you’ll be able to see from the following chart, I’m plotting the correlation between Bitcoin costs and QCOM and INTC’s diluted EPS on a quarterly foundation this time. I do know for a proven fact that these two chip makers have little or no publicity to Bitcoin mining. And certainly, their EPS exhibits little or destructive correlation to Bitcoin costs (0.025 common within the case of QCOM and -0.117 within the case of INTC).
Abstract of dangers and ultimate ideas
To recap, prime on Robertsen’s 2023 black swan occasions is one other 70% drop in Bitcoin costs to round $5000. And I view this as believable contemplating components like inadequate funds, bankruptcies, and traders’ psychological shift to extra acquainted safe-haven belongings like gold.
Such a black swan occasion might have a big and destructive impression on NVDA costs from a mix of bodily impression and likewise fundamentals – that are each vital and intertwined in investing. Primarily based on my outcomes, my view is that NVDA administration continues to be underestimating the impression of their crypto publicity, seemingly as they did again in 2018. Up to now 12 months, BTC costs have dropped from ~$65k to ~$17k (translating into an annual decline of ~74%), and the YoY development charges of NVDA’s working income (on a quarterly foundation) turned from a ~50% growth to a 16.5% contraction. In line with this current Reuters report, NVDA’s provide of crypto-mining chips continues to be contributing to its gross sales to a considerable extent. Within the meantime, funding in NVDA additionally entails substantial valuation danger at this level. Its FY1 P/E is about 48x, greater than double that of AMD’s 20x and nearly quadruple that of INTC (14x) and QCOM (11x).
All instructed, I don’t suggest participating at this level. The draw back is just too giant with the mix of destructive psychological impacts from Bitcoin costs, earnings impacts, and likewise the valuation dangers.