Watch out, Advanced Micro Devices, Inc. (NASDAQ:AMD) and NVIDIA Corporation (NASDAQ:NVDA) investors. Word on the Street has it that Bitmain, a cryptocurrency mining company has developed an application-specific integrated circuit (ASIC) for Ethereum mining.
In fact, Susquehanna analyst Christopher Rolland can “confirm” this and fears that as cryptocurrencies fire up, “the proliferation of Ethereum mining ASICs have the ability to impact ~20% of AMD’s total company revenue (and ~10% for NVDA).” Moreover, the analyst wonders if even more than 20% of AMD’s total sales suffer should “aftermarket sales abound.”
“The steam shovel cometh,” Rolland cautions, understanding that Ethereum-related graphics processing unit (GPU) sales are moneymakers for these two chip giants. Even though “this call is likely early (in front of needed GPU channel replenishment),” the analyst anticipates PC graphics cards demand is going to take a real hit as “ETH mining gets its ASIC.”
Rolland boils down his new bearish case for AMD, asserting: “The commercialization of this ASIC, coupled with: 1) continued pressure on Ethereum coin prices ($530 today, down from a peak of $1,385 in January); 2) a potential move from PoW to PoS (perhaps in 2019); 3) additional Chinese chip makers developing Ethereum ASICs; and 4) the potential for increased secondary market GPU sales, potentially cannibalizing future GPU sales, compels us to downgrade.”
Though Rolland is waiting to turn bearish on Nvidia, his target expectations just got lower, as he points out a second key hyperscaler has developed an artificially intelligent ASIC for the Data Center: “Additionally, we have learned of the development of another hyperscale AI ASIC, similar to Google’s TPU2, that begins production in 2Q18 and may reduce AI GPU growth in the data center.”
AMD has certainly made impressive strides forward in the latest few years thanks to CEO Lisa Su- and Rolland is not blind to this. Were valuation to change amid the unwinding of Ethereum-related GPU buzz, the analyst would be glad to leave the bearish camp.
Why is NVDA safe from the downgrade? As far as Rolland is concerned, Nvidia’s gaming franchise stands with more strength and greater durability and a meaningfully less portion of the company’s total revenue stems from Ethereum-related GPU sales. Odds are pressures on NVDA shares from the creation of hyperscale AI ASICs should “cannibalize” at a slower pace than Ethereum mining, concludes Rolland.
Therefore, the analyst downgrades AMD from a Neutral to a Negative rating while hacking the price target nearly in half from $13 to $7.50, which implies a close to 29% downside from current levels. Additionally, though the analyst reiterates a Neutral rating on NVDA, he chops the price target from $215 to $200, which implies a nearly 19% downside from current levels. (To watch Rolland’s track record, click here)