A company is certainly hitting on all cylinders when the stock price falls after the company reports a blow-out quarter. That’s just what happened when Nvidia (NASDAQ: NVDA) reported earnings last week.
After the earnings call on May 10, shares dropped 2.3% overnight and continued to fall this week after the company reported earnings of $1.24 billion—or $1.98 per share—on revenue of $3.2 billion, and with gross margins of 64.5%.
Net income is up 145% year-over-year. Revenue is up 66%. So what gives?
Sometimes it’s impossible to please the market, and the bears say that too much of what’s great about Nvidia is pegged on the rise of cryptocurrencies.
In the earnings report, Nvidia broke down how much it has gotten from cryptocurrency “mining” companies that use its fast graphics chips to figure out answers to the numerical puzzles underlying Bitcoin and other cryptocurrencies.
Nvidia said these companies represented $289 million in revenue in the first quarter, that’s 23% of its total, and they expect that number to fall by two-thirds in Q2.
“Cryptocurrency demand was again stronger than expected, but we were able to fulfill most of it with crypto-specific GPUs,” Nvidia CFO Colette Kress said on the earnings call. “Looking into Q2, we expect crypto-specific revenue to be about one-third of its Q1 level.” And after the bull run in cryptocurrencies into early 2018, the hype has since fallen and miners’ profits are shrinking with some miners switching to more energy-efficient chips.
But here’s the thing. Looking at the numbers and executives’ statements, Nvidia’s future growth doesn’t live and die with cryptocurrencies. Nvidia’s real growth area is in gaming, and this chart from CB Insights proves it:
While the noise has been about Nvidia’s ties to the cryptocurrency world, the company’s gaming revenue surged 68% to $1.7 billion, and the gaming chip business represented roughly 53% of Nvidia’s first quarter sales.
“Nvidia’s bread-and-butter markets are gaming, data centers, and auto tech. Despite all the hand-wringing about cryptocurrency mining, Nvidia has barley mentioned cryptocurrency keywords on its calls,” says CB Insights.
Not only that, but the company’s management has guided Q2 sales to be about 39% higher compared to last year’s levels despite the softening demand from cryptocurrency miners. This goes to show that Nvidia’s momentum is, indeed, intact.
At this point, any weakness in Nvidia’s shares is really just a buying opportunity for long-side investing, so forget the noise.