It is no secret that virtual reality, augmented reality, stronger video game graphics, artificial intelligence and machine learning have all been major growth drivers for the makers of chips and processors. Cryptocurrency, the likes of Bitcoin and rivals, has been a great contributor to the growth as well, and some investors have begun to worry that the cryptocurrency impact may have been too much.
According to Jefferies, the cryptocurrency impact on Advanced Micro Devices Inc. (NASDAQ: AMD) and NVIDIA Corp. (NASDAQ: NVDA) has been significant, but the risk of a “crypto-driven” inventory correction driving material downside is low in the near term. Jefferies noted that cryptocurrency sales in the second quarter of 2017 as a portion of all revenue was only about 3% for AMD and 10% for NVIDIA.
Jefferies noted on Monday that cryptocurrency prices have increased materially since bottoming in July. The firm also noted that both AMD and NVIDIA have introduced cryptospecific GPU models that have a low risk of competing with core gaming GPUs in secondary markets.
The report noted that if cryptocurrency prices were to decline dramatically again, AMD’s risk of competing with its own GPUs resold by miners in secondary markets is lower than in the 2013 to 2015 cycle. That would be only a $39 million risk based on last quarter for AMD.
For NVIDIA, that 10% risk would be more like $218 million, but that was split into two separate buckets. The first $150 million is about 7% of sales based on cryptocurrency specific SKUs that have the video capability disabled and roughly $68 million representing 3% of quarterly sales of gaming GPUs purchased by cryptocurrency miners.
While all investors need to consider downside risks or risks of what happens when certain markets become too hot and lofty, Jefferies further discounts most cryptocurrency risks by noting that it expects demand for cryptocurrency-mining GPUs to remain healthy in the third quarter.
And on the risk that cryptocurrency is just another fad, the firm admits that it could be, but it doesn’t believe that to be the case as blockchain has applications in financial services well beyond cryptocurrencies. Jefferies also addresses the future by noting that demand for blockchain GPUs will continue to grow and become an important driver for GPU growth, even if that growth comes with some degree of volatility.
AMD is rated as Buy with a $19 price target from Jefferies, and its shares were up about 2.8% at $12.60 early Monday. Its 52-week trading range is $5.66 to $15.65, and its consensus analyst target price is $14.23. While the firm’s $19 target price is well above consensus, the street-high target from the Thomson Reuters analyst pool is up at $22.
Jefferies rates NVIDIA with a Buy rating with a $180 price target, versus a $155.58 consensus target and a street-high target of $200 from Thomson Reuters. NVIDIA shares were up 2.5% at $167.90 on Monday, with a 52-week range of $57.32 to $174.56.
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