The prices of leading cryptocurrencies are rocketing upwards at accelerating rates, and that's good news for investors in semiconductor manufacturer Nvidia Corp. (NVDA), whose shares are poised to rise 18% from today's levels, according to RBC Capital Markets, a division of the Royal Bank of Canada (RY).
The mining of various cryptocurrencies requires fast graphics processing units (GPUs), a field in which Nvidia is a leader, and the company is developing chips that "could further optimize the mining process of major digital currencies such as Bitcoin and Ethereum," according to The Coin Telegraph. Nvidia is at the very top of the "50 Smartest Companies 2017" list compiled by the MIT Technology Review. (For more, see also: How Artificial Intelligence Will Boost These 8 Stocks.)
RBC analyst Mitch Steves has given Nvidia an outperform rating since August 12, 2016, when his price target was $72, according to RBC's November 24 report, "NVIDIA Corporation: Crypto Currency Mining...It's Happening for the Third Time." Now that target is $250, or about 18 percent above Nvidia's price of $211 around noon on Tuesday.
Steves bases his $250 target on a P/E multiple of 40 applied to full year 2020 EPS, implying a 2020 earnings forecast of $6.25 per share. Consensus EPS estimates are $4.19 for 2018 and $4.70 for 2019, per Thomson Reuters data reported by Yahoo Finance. The current forward P/E for Nvidia is 46 as of Monday, per the same sources.
Various cryptocurrencies that use technologies based on GPUs have exploded in price during recent weeks, per Steves. In the course of approximately three weeks prior to the issuance of that report, RBC calculates that the approximate price increases in major cryptocurrencies were: Ethereum, 50%; Monero, 85%; zCash, 36%; and Bitcoin gold, 145%.
RBC estimates that the rapidly-growing market for cryptocurrencies is now worth more than $300 billion, and they expect to see more investment in them from institutions and high net worth individuals alike. While not citing a precise time frame, RBC expects this market to exceed $1 trillion. They also "believe that the need to build out a decentralized world computer will command material compute power benefiting companies such as Nvidia." Nividia stock is up 101% for the year-to-date through Monday, while the S&P 500 Index Index (SPX) has advanced 16% during the same period.
Quick Payback Periods
Speculators in cryptocurrencies regularly talk about payback periods, or how long it should take to recoup their initial investment. In other words, the payback period indicates how quickly these assets are doubling in price. As one example, Steves notes that the recent increase in the price of Ethereum, cited above, has reduced its payback period from only about 9.4 months to around a mere 5.6 months. While he writes that such shortening of payback periods "may lead to continued strength in GPU sales related to crypto currency mining," others will see a speculative bubble that recalls the Dutch tulip mania of the 17th century. (For more, see also: The Investor Handbook for Profiting Off Market Bubbles.)
Steves remains bullish on Nvidia despite the fact that its revenues from crypto-related products fell by more than 50% from the second quarter to the third quarter, from $150 million to $70 million, CNBC reports. Meanwhile, a major competitor of Nvidia in the manufacture of GPUs, Advanced Micro Devices Inc. (AMD), has warned its investors about slowing growth in the demand for cryptocurrency, per CNBC.
This is problematic for Nvidia, since cryptocurrencies drive about 10% of its revenue, according to estimates from Jefferies LLC cited by Seeking Alpha. This is about three times the proportion at AMD, per the same sources. Additionally, Seeking Alpha quotes research indicating that Ethereum may implement payment verification procedures that will reduce demand for Nvidia chips dramatically in such applications, as well as "powerful macroeconomic and geopolitical factors aligned against cryptos."