(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
When Bitcoin shares began surging higher during the summer months of 2017, expectations began to grow that Nvidia Corp. (NVDA) and AMD Inc. (AMD) would be principal beneficiaries. The chips produced by both companies are used to mine for Bitcoin and other cryptocurrencies. But since the start of 2018, the price of Bitcoin has fallen by roughly 45%, while shares of Nvidia have risen by nearly 23%, and AMD has climbed by almost 26%.
The divergence between Bitcoin and the two chip stocks should come as no surprise because both Nvidia and AMD derive just a small part of their business from cryptocurrency mining. An Investopedia article on December 22 noted that Nvidia had total revenue in the third quarter of only 2.5% from cryptocurrencies, while AMD had already been talking about trends fading. (For more, see also: AMD and Nvidia, Bitcoin Fears Maybe Overblown.)
The chart below shows the sharp rise and fall in Bitcoin over the past 52 weeks, compared to that of Nvidia. Although Nvidia shares did move lower in mid-November through the start of 2018, it was likely tied more to the weakness of the chip sector at that time. But as the chart shows, Nvidia price has continued to rise, while the Bitcoin price has continued to collapse. (For more, see also: Cryptocurrencies May Boost Nvidia By 18%: RBC.)
Shares of AMD saw a period where the stock price rose on the exuberance of Bitcoin's rise, but shares were actually down in 2017 by nearly 10%. Again proving that AMD's tie to Bitcoin seemed to be more perception than reality because shares of AMD did not benefit at all from Bitcoin's sharp rise.
With Nvidia getting such a small amount of revenue from Bitcoin, and AMD never even participating in the great rise of Bitcoin's price, it is no wonder why neither stock has reacted to the collapse in the price of the currency. It tells us for the most part that investors can sometimes find a relationship and attribute more emphasis on that link in the stock price than it may deserve.
It should also teach us all a valuable lesson that understanding our investments is critical. Just because a stock is perceived to be a beneficiary of another asset, it doesn't mean it is a reality. But still, some investors continue to see the possibilities of other cryptocurrency, such as Ether, helping to fuel revenue growth.
The next time Nvidia or AMD rise or fall on Bitcoin news, remember the market is likely acting more on emotion and perception rather than reality.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.