Graphics card manufacturers are riding high on renewed interest in cryptocurrencies.
While historically the slowest time of the year for these businesses, Q2 proved to be lucrative for Nvidia and Advanced Micro Devices (AMD) as interest in ethereum and other cryptocurrencies has exhausted graphics processing unit (GPU) inventories.
That's because, while not designed for the technology, GPUs from product lines such as Nvidia's GeForce and AMD's Radeon can be used to mine ethereum and other popular public blockchains, including litecoin, NEM, dash, monero and NEO. This means that by running special software, these hardware components allow users to compete for lucrative rewards. (On the ethereum blockchain, each block is now worth nearly $2,000).
And as the value of these digital assets has surged in the second and third quarters, GPU companies have seen booming demand. Nvidia posted a record $2.23 billion in revenues for the quarter ending June 30 – a 56 percent increase over the prior-year quarter and $280 million above the company's forecast.
Further, AMD, whose new graphics card sold out within minutes, grew revenues 19 percent to $1.22 billion, catalyzed by a 51 percent surge in sales from its computing and graphics division.
Industry-wide, shipments of add-in boards – which house the external graphics cards used by cryptocurrency miners – were up 31 percent from the first quarter to the second, according to Jon Peddie Research, a market research firm which tracks GPU sales.
By contrast, over the last decade, first to second quarter shipments declined by an average of 10 percent, and plummeted by 22 percent in 2016.
To further illustrate the explosive demand for crypto mining, Jon Peddie, president of the research firm, emphasized the sales were almost entirely driven by high-end GPUs – which typically sell for between $500 and $1,000 – which are the most powerful and preferred by miners.
Peddie explained:
"At normal distribution, the high end is 10 percent [of units]; now it's more like 90 percent. If you took the high-end sales out of the equation, you would have seen a second quarter drop that would be normal seasonality."
Reasons for optimism
A hallmark trait of any asset bubble is the proclamation that "this time is different," even though the end result is usually the same: a price collapse.
Yet, there is ample reason to believe that this mining boom might actually be different, as the surge in demand in 2017 is much stronger and more diversified than what was observed in 2013.
Ambrish Srivastava, an equities analyst who covers both companies for BMO Capital Markets, a division of the Bank of Montreal, went so far as to make this assertion in a recent note to clients, writing:
"There is merit to that argument. There are many more currencies; there is a lot more momentum behind [mining]."
Not only is the popularity of ethereum and tokens issued on its blockchain continuing to grow, there are no alternatives that could render GPUs unnecessary on the network, which now holds $36 billion in value.
In short, investments in GPUs for mining could have staying power. While bitcoin eventually saw GPU mining replaced by more powerful ASIC designs, ethereum's mining algorithm is built to resist this outcome.
"That algorithm is written in such a way that it will only run on a GPU. Alternative silicon solutions aren't forthcoming," said Peddie. "As long as people can make money doing ethereum mining, they will continue to invest in GPUs."
Manufacturer's take
Yet, a key question for both of these companies, and more broadly the industry, is how long the crypto-boom, and the mining demand it fuels, will continue.
During Nvidia's second quarter earnings call, company CEO Jensen Huang was optimistic that the roughly $150 million in revenue made during the quarter from GPU sales for crypto mining would continue, asserting cryptocurrencies and blockchain are "here to stay."
He continued:
"This is a market that is not likely to go away anytime soon, and the only thing that we can probably expect is that there will be more currencies to come. It will come in a whole lot of different nations. It will emerge from time to time, and the GPU is really quite great for it."
While these comments are quite bullish, Colette Kress, Nvidia's chief financial officer, attempted to walk them back in a follow up call with analysts, according to Kevin Cassidy, an equities analyst with Stifel Nicolaus.
"When I asked the CFO for more details on that, she said, 'Well, I think he overplayed that.' She's a little more cautious on the market," Cassidy told CoinDesk.
And this carefulness echoes AMD CEO Lisa Su, who took a more tempered approach in her company's second quarter earnings call.
"It's important to say we didn't have cryptocurrency in our forecast, and we're not looking at it as a long-term growth driver," she said, adding:
"We want to be cognizant of the fact that some of the graphics demand that we see might be temporal. So we're not counting on that staying through the full year. Frankly, I think we'll see what happens with the whole mining stuff."
Unlike Nvidia, AMD did not estimate how much revenue it derived from mining activity, but Mitch Steves, an equities analyst with RBC Capital Markets, surmises the figure is between $220 million and $250 million.
Because AMD is much smaller than Nvidia, but recognized as the market share leader for crypto mining products, the company has little to gain by promoting the extent to which it benefits from the activity, since Steves estimates it would be material to their top line.
"So that’s why they try to message it differently," Steves continued. "If AMD comes off as really aggressive and, let's say, 10 percent of their top line is going to cryptocurrencies, investors are going to be wary to pay for that revenue because it could go away very quickly."
Possible headwinds
And there are looming headwinds that will likely put pressure on mining demand and, by extension, GPU sales. For instance, upcoming changes to ethereum’s infrastructure are likely to eliminate altogether the need for mining in its ecosystem.
"While we have seen a surge in demand from cryptocurrency mining in the second quarter for GPU cards, we are not at all bullish on the sustainability of this demand," Srivastava wrote.
Several other analysts doubled down on that skepticism, wondering if a sharp slowdown might prompt a repeat of the crypto-bust of 2013 and 2014, when a decline in bitcoin prices prompted miners to jump ship and begin selling off their GPUs – primarily AMD devices – on the secondary market.
Srivastava told CoinDesk:
"I talked to miners who said 'The moment the price collapsed and the economics went against mining, I just immediately sold all of my stuff on eBay at whatever price I could get.'"
The fallout from the bust subsequently throttled AMD's sales for several ensuing quarters.
"That caused AMD to have inventory problems," explained Cassidy. "No one was buying new cards because you could buy used cards for half the price."
And that's a scenario many people are cautious of.
GPU image via Shutterstock
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