Bitcoin surge could backfire for AMD, Nvidia — and Wall Street can’t see the risk

Right now the boom in bitcoin and other cryptocurrencies is giving sales an extra push

By
RYAN
SHROUT
The effects of the most recent cryptocurrency mining phase are having a direct impact on various markets, most notably on the GPU product lines from Nvidia and AMD.

Without going into the details of what a cryptocurrency is or how it is created and distributed on a shared network, you only need to understand that it is a highly speculative market and gold rush that is accelerated and profitable because of its ability to run efficiently on graphics cards usually intended for the PC gaming markets. Potential investors need only purchase basic PC components and as many GPUs as they can afford to begin a mining operation with the intent to turn a profit.

As we look at the sales channels today, AMD AMD, +0.73% Radeon graphics cards from the current and previous generation of GPU are nearly impossible to find in stock, and when you do come across them, they are priced well above the expected manufactured suggested retail price.

This trend has caused the likes of the Radeon RX 580, RX 570, RX 480, and RX 470 to essentially disappear from online and retail shelves. This impact directly hit AMD products first because its architecture was slightly better suited for the coin mining task while remaining power efficient (the secondary cost of the mining process).

But as the well dries up around the Radeon products, users are turning their attention to Nvidia NVDA, -1.02% eForce cards from the Pascal-based 10-series product line and we are already seeing the resulting low inventory and spiking prices for them as well.

Positive impacts
For AMD and Nvidia, as well as their add-in card partners that build the products based on each company’s GPU technology, the coin-mining epidemic is a boon for sales. Inventory that might have sat on store shelves for weeks or months now flies from them as soon as they are put out or listed online, and reports of channel employee-driven side sales are rampant. From the perspective of this chain, GPU vendor, card vendor and reseller, a sale of a card is never seen as a negative. Products are moving from manufacturers to stores and to customers; the goal of this business from the outset. Cryptocurrency has kept the AMD Radeon brand selling even when its product stack might not be as competitive with Nvidia as it would like.

This trend of GPU sales for coin mining is not going unnoticed by the market either. Just today a prominent securities fund upgraded Nvidia’s stock after speaking with add-in card vendors about stronger than expected second-quarter sales. AMD’s stock has seen similar improvement and all relevant indicators show continued GPU sales increases through the next fiscal quarter.

Read: Nvidia upgraded as cybercurrency miners go bonkers for its chips

Negative impacts
With all that is going right for AMD and Nvidia because of this repurposed used of current graphics card products lines, there is a significant risk at play for all involved.

Browse into any gaming forum or subreddit and you’ll find just as many people unhappy with the cryptocurrency craze as you will happy with its potential for profit. The PC gamers of the world that simply want to buy the most cost-effective product for their own machines are no longer able to do so, with inventory snapped up the instant it shows up. And when they can find a card for sale, they are significantly higher prices. A look at Amazon.com today for Radeon RX 580 cards show starting prices at the $499 mark but stretching to as high as $699. This product launched with an expected MSRP of just $199-$239, making the current prices a more-than-two-times increase.

As AMD was the first target of this most recent coin mining boon, the Radeon brand is seeing a migration of its gaming ecosystem to Nvidia and the GeForce brand. A gamer that decides a $250 card is in their budget for a new PC would find that the Radeon RX 580 is no longer available to them. The GeForce GTX 1060, with similar performance levels and price points, is on the next (virtual) shelf over, so that becomes the de facto selection. This brings the consumer into Nvidia’s entire ecosystem, using its software like GeForce Experience, looking at drivers, game optimizations, free game codes, inviting research into GeForce-specific technology like G-Sync.

For Radeon, it has not lost a sale this generation (as the original graphics card that consumer would have bought has been purchased for mining) but it may have lost a long-term customer to its competitor.

Even if the above problem fades as Nvidia cards also become harder to find, Nvidia has the advantage of offering current-generation, higher-cost products as an option to PC gamers. If a user has a budget of $250 and finds that both the GeForce and Radeon options are gone to the crypto-craze, Nvidia has GeForce GPUs like the GTX 1070 and GTX 1080 that are higher priced, but more likely to be at their expected price point (for now). AMD has been stagnant at the high end for quite some time, leaving the Radeon RX 580 as the highest performing current generation product.

Alienating the gaming audience that maintains both Radeon and GeForce from year to year is a risky venture, but one that appears to be impacting AMD more than Nvidia, for now.

Other potential pitfalls from this cryptocurrency market come into play when the inevitable bubble reaches its peak. All mining operations get more difficult over time, on the order of months, and make the profitability of mining coins much lower and requires significantly more upfront investment to turn a profit. The craze surrounding mining is driven in large part by the many “small” miners, those that run 10 to 30 cards in their home. Once the dollar figures start dropping and the hassle and cost of upkeep becomes a strain, these users will (and have in the past) halt operations.

This has several dangers for AMD and Nvidia. First, inventory that may be trying to “catch up” to the cryptocurrency mining levels of sales rates could be caught in the line of fire, leaving both GPU vendors and their partners holding product in their hands than they cannot sell.

Second, the massive amounts of hardware used for mining purposes will be found on the resale markets like eBay, Amazon, and enthusiast forums. Miners no longer interested in cryptocurrency will be in competition now to sell the RX 580s they have amassed as quickly as possible, dropping the value of the product significantly. If AMD or Nvidia are in a rollout mode for a new generation of product at that time, that means new product sales will be directly impacted as slightly older hardware at a great value is suddenly available to that eager gaming audience.

As for a more direct financial risk, both company’s stocks risk corrections when this mining bubble breaks down.

The disappointing part of this situation is that neither AMD or Nvidia can do anything to prevent the fallout from occurring. They could verbally request miners leave products for gamers, but it would obviously stop nothing. A price hike would only hurt the gaming community more as miners are clearly willing to invest in GPUs when they are used for profit. And trying to limit mining performance with firmware or driver changes would be thwarted by an audience of highly intelligent mining groups with re-flashes and workarounds.

The rumors of both vendors offering mining-specific hardware appear to be true, selling headless (without display connectors) graphics cards is perfect for crypto mining and makes them unusable for gaming. This allows Nvidia and AMD to use previously wasted GPUs that might have had a fault in the display engine for example. But it wouldn’t be enough of a jump in inventory to open standard cards for gamers. If anything, the mining community would simply swallow that as well.

The cryptocurrency market may not be a bubble, but the GPU-based mining operations that exist today certainly are. And the long-term impact that it will have on both AMD and Nvidia will be a negative one. For today, all parties involved will enjoy high sell-through, increased ASPs, and happy investors. But the writing is on the wall from previous instances of this trend to know that there will be fallout. The question is only how much it will impact future product and which GPU vendor is capable of balancing current benefits with long-term detriment.

Ryan Shrout is the founder and lead analyst at Shrout Research. This first appeared on Tech.pinions — How the Cryptocurrency Gold Rush Could Backfire on Nvidia and AMD