Summary: AMD, in its Q4 earnings call, revised its cryptocurrency exposure up to high-single-digits, while an analyst noted that the “amount of hash compute being added to Ethereum in January is more than the whole of Q4.” This is a huge deal! Despite the pullback, if you bought Ethereum on the first day of 2017, you still made an incredible 11,171%! Yet, even sophisticated Wall Street investors do not understand even basic crypto concepts, like the fact that there is much more to the market than Bitcoin. That means more opportunity for the rest of us.
On February 2nd, 2018, Citron Research, a famous short selling firm, tweeted another attack on NVIDIA (ticker: NVDA), writing “great company dangerous stock” because the stock has rallied while Bitcoin has dropped. While we have respect for Citron and Mr. Left, we believe that this attack demonstrates that Wall Street, even sophisticated short sellers like Citron, just doesn’t get the crypto market.
This is great news because that means mo’ money for us.
After reading Citron’s recent note, anyone with a basic understanding of cryptocurrencies are probably asking “what does BTC have to do with NVDA?” On December 31st, 2017, we wrote an article on NVDA’s exposure to Bitcoin titled “NVIDIA And A Bitcoin Meltdown” — we recommend those who did not ask that question to read this article for background information.
In our article, we pointed out that NVDA has no exposure to BTC since bitcoins are mined by ASICs rather than the GPUs that NVDA and Advanced Micro Devices (AMD) offers. However, we reminded investors that NVDA does have a small exposure to cryptocurrencies (as described by management in its October earning call) that are mined by GPUs, and that cryptocurrencies has a history of being positively correlated. For example, cryptocurrencies that are currently being mined by GPUs include Ethereum, which is the largest cryptocurrency after Bitcoin and tend to be positively correlated with Bitcoin.
Readers should keep in mind that when we wrote the NVDA article, it was still in the very early innings of the cryptocurrency sell off, so historical correlations served as a good analytical tool. However, with new information now in the market including Ethereum’s actual price performance and commentary from AMD, we question why anyone at this point would point to BTC (that is short for bitcoin) when trying to analyze NVDA.
If you put together BTC and ETH side-by-side in a chart, especially if we look at the price performance using the log scale (which shifts the attention from absolute dollar numbers to percent return), we can clearly see that there is significantly more momentum behind ETH compared to BTC.
Generally speaking, investors tend to think that more volatile, smaller market-cap assets like ETH should sell off more than bitcoin during a “risk-off” environment. However, this has not proved to be the case as BTC pulled back 54% from its all-time-time vs only 34% for ETH (as of February 2nd, 2018). In fact, investors who purchased BTC at the beginning of 2017 are still sitting on a 785% return while ETH investors are sitting on a mind-blowing 11,171% return (using closing price on 1/1/2017 and 2/2/2018).
Given the massive differences in returns and pullback, anyone who is pointing to BTC’s pullback when trying to analyze NVDA is completely missing the point, and likely underestimating the seismic impact on the GPU market caused by the emergence of ETH over the past year.
I don’t blame Citron from underestimating Ethereum and defaulting to Bitcoin. Even AMD’s CEO underestimated their crypto exposure. On AMD’s 4Q17 earnings call (1/30/2018), AMD’s CEO said:
I previously said we thought it was about mid-single digits percentage of our annual revenue. It may be a little bit higher than that, let’s call it a point…
What we see in the market, though, is – because I know there’s a lot of conversation about this out in the market, it is an important market. I mean, we’re now seeing it from the standpoint of there is a lot of dynamic movement in the market. But it is consuming a lot of GPUs. It’s a good part of our business, and we intend to sort of work with the large players to better forecast that business going forward.
In the same call, in the Q&A section, an analyst also noted that “if I look at the amount of hash compute being added to Ethereum in January, I mean, it’s more than the whole of Q4. So we’ve seen a big start to Q1.”
In my AMD article, I estimated AMD’s crypto exposure to be only in the 3-4% range, which was based on management’s commentaries and disclosures were well documented in the article. However, it now appears that AMD is retroactively changing the narrative from “mid-single-digit percentage of that growth is due to crypto” to maybe a point higher than “mid-single digits percentage of our annual revenue”.
In other words, AMD’s crypto exposure turned out to be around 6-7%, likely driven by upside surprise in Q4 given Ethereum’s 145% return in Q4 2017. Furthermore, per the analyst cited above, January was bigger than the whole of Q4. This is not surprising since Ethereum’s 34% pullback from its all-time-high means little when compared to its rapid emergence over the past year, which lead to a huge backlog of orders and persistent GPU shortages as new market participants enter the Ethereum ecosystem.
In summary, people still don’ get it. AMD underestimated crypto and is now retroactively trying to change their language. This is a great CYA (cover your ass) strategy but does nothing to help relieve the market of the GPU shortage problem. Sophisticated Wall Street types like Citron don’t get it. They still think Bitcoin is being mined by GPUs, and probably doesn’t know anything about Ethereum. What this suggests to me is that we are still in the early innings of the crypto boom, and you, our dear readers, are still early adopters.