Cryptocurrency Clouds Hang Over Case To Buy Nvidia Stock Anytime Soon

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With cryptocurrencies falling amid two negative catalysts, Nvidia (NASDAQ:NVDA) stock has retreated meaningfully in recent weeks. NVDA stock lost 6.9% in the back half of September as the Nasdaq 100 index shed 4.5%.

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Since that trend looks poised to continue for some time, investors should hold off on buying NVDA stock for now. Yet, I remain bullish on Nvidia’s longer-term outlook.

Crypto Downturn Prods NVDA Stock Pain

For a long time, I’ve predicted that the waning of federal stimulus dollars and government crackdowns would have a significant, negative impact on cryptocurrencies. I’ve also long predicted that this crypto downturn would hurt Nvidia’s shares.

Now it looks like that scenario is indeed playing out. Since Bitcoin’s (CCC:BTC-USD) recent peak around $52,700 during the week after Labor Day, when both the federal unemployment bonus and the federal rent moratorium ended, the currency had lost about 25% as of the morning of Sept. 29. Ethereum (CCC:ETH-USD) is down by roughly the same amount over the identical time period.

And during that time period, the shares of Nvidia, which makes tools used by crypto miners, have fallen about 10%.

Also weighing on crypto prices in recent days has been an assertion by the Chinese central bank that crypto exchanges in other nations could not be legally used by Chinese citizens. The bank also stated that employees of crypto exchanges living in China “would be investigated if they continued to advertise or offer crypto-related services,” The Wall Street Journal reported.

Proof Change Cuts Out GPU Need

In the second quarter, Nvidia generated $266 million of revenue from its crypto products, well below its guidance of $400 million.  Although the $266 million of crypto equipment sales only represented 4% of Nvidia’s total revenue, the Street sometimes becomes concerned about changes that shave even a few percentage points from companies’ top lines.

Indeed, the recent deep decline of the NVDA stock price suggests that investors are indeed concerned about the impact of the crypto decline on the chip maker.

Meanwhile, Seeking Alpha contributor Paulo Santos recently warned that NVDA stock looks poised to be hurt by Ethereum’s transition to a “Proof of Stake” (PoS) model from its previous “Proof of Work” (PoW) system. PoS does not require any of Nvidia’s graphics processing units, the author explained.

Conversely, “Ethereum is the largest cryptocurrency requiring GPUs to be mined,” as a different type of chip is utilized to mine Bitcoin, Santos wrote. So even if crypto prices do not continue to sink, Nvidia’s sales of GPUs for crypto mining are likely to tumble.

Longer-term Outlook Remains Upbeat

Goldman Sachs expects demand for semiconductors to be very strong amid powerful demand for the chips, as InvestorPlace analyst Louis Navellier recently noted. And the International Data Corporation expects the sales of semiconductors to climb 17.3% this year, with the output of the sector’s supply chain improving in Q3 before “normalizing in 2022,” Navellier wrote.

Moreover, in my June 15 column, I pointed out that Nvidia should benefit meaningfully from both the rapidly expanding demand for artificial intelligence (AI) and its own use of AI to greatly speed up data center chips. Indeed, I cited a Forbes columnist who wrote that “10 of 10 top Aerospace companies, 6 of 10 top US banks, and 8 out of 10 top global telcos” are utilizing Nvidia’s DGX server, which is widely utilized to create AI.

And, as I’ve also written previously, Nvidia should benefit significantly over the long-term from the rapid proliferation of data centers and connected automobiles.

Bottom Line on NVDA Stock

From Sept. 23 to the morning of Sept. 29, Nvidia’s shares dropped about 8%. Amid continued worries about the outlook of the company’s crypto mining business, the shares are likely to trade lower over the next month or two.

As a result, I think that investors should wait for an entry point around $180-$190 before taking a bullish position in the name.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.