BARCLAYS: Nvidia and AMD are safe for now, but a 'bomb' is coming
Cryptocurrencies have had a crazy year. As an example, ethereum has rocketed about 2,073.24% higher over the last year. The meteoric rise has been a big boost for graphics card makers like AMD and Nvidia, but the end is in sight.
Ethereum's rise has been good for AMD and Nvidia because the companies' graphics processing units are used to "mine" ethereum.
With ethereum's price dramatically increasing, it became economical to buy a GPU and use it to mine ethereum. Both AMD and Nvidia have profited from miners buying their GPUs, to the point that the cards from both companies were hard to find on shelves.
The question is, how long will ethereum miners continue to buy AMD and Nvidia's cards? According to one analyst at Barclays, the companies can breathe a sigh of relief for now, although a change in mining algorithms is coming and could be a problem.
"Artificial difficulty bombs are delayed until (estimated) 4Q18 as Proof-of-Stake is not ready yet," Blayne Curtis, an analyst at Barclays, said in a note to clients. "This means difficulty increases much more slowly, improving the trajectory of expected profits (holding all else equal) and likely sustains GPU sales for mining."
The proof-of-stake system Curtis called a "difficulty bomb" is a new way of verifying payments on the ethereum network. Instead of asking miners to solve complicated math problems that are well-suited to being calculated on GPUs, it operates under a sort of voting system where users vote on which payments are correct. The ethereum network is expected to eventually shift to this sort of verification, but it's not ready yet.
If and when ethereum does move to proof-of-stake verification, GPUs wouldn't give miners as much of an edge on the network, meaning the cards would fall out of vogue as a way of grabbing a larger piece of the verification payments. Luckily for Nvidia and AMD, this move was pushed back, and isn't expected until the end of 2018.
Because of this, Curtis raised his price targets for Nvidia and AMD. Essentially, both companies get to ride the cryptocurrency wave that increased demand for their chips for another year. Curtis raised his target for AMD from $9 to $10, and his price target for Nvidia from $140 to $200.
Curtis favors Nvidia because of its dominance in AI and he predicts that Nvidia's cards will continue to perform at higher levels than AMD's for the foreseeable future.
"The Crypto tailwind is hard to quantify but likely 2x the $170-180 million AMD/Nvidia identified in June with some gaming card manufacturers seeing 50-70% of current demand from mining as gaming demand is actually declining this year," Curtis said.
AMD is up 17.37% this year, while Nvidia is up 77.55%.
