Morgan Stanley Sees Ethereum's Strength Benefiting AMD, Nvidia

Forget about bitcoin. For Advanced Micro Devices, Inc. AMD and NVIDIA Corporation NVDA investors, the cryptocurrency story is all about Ethereum.

The Analyst

Morgan Stanley analyst Joseph Moore reiterated an Underperform rating and $8 price target for AMD and an Equal-Weight rating and $222 target for Nvidia. Moore raised its Q4 EPS estimates for AMD and Nvidia to 9 cents and $1.25, respectively.

The Thesis

Ethereum’s price surge in recent months extend the mining opportunity for AMD and Nvidia, according to Moore.

Back in November, Moore said that, contrary to popular belief, bitcoin is irrelevant to graphics vendors because it moved to application-specific integrated circuit chips several years ago. Instead, most graphics-based mining is being driven by bitcoin rival Ethereum at this point.

At the time, Moore predicted Ethereum-related graphics sales would decline by 50 percent in 2018, but the cryptocurrency’s subsequent price surge from $293 to near $1,000 has changed the economics for miners.

“This has created a situation where the payback on new mining rigs has declined back to 57 days from ~6 months in October, which has created a substantial demand for Ethereum mining hardware and as a result AMD and NVDA GPUs,” Moore says.

Despite the fact the Q4 sales may be boosted by unexpected mining demand, Moore says the market will likely recognize that this phenomenon was only temporary.

For AMD, Moore says the recent Spectre and Meltdown security patches negatively impacted Intel Corporation INTC CPUs more than AMD CPUs, but the issue likely won’t drive more business to AMD.

For Nvidia, cryptocurrency is just one of many growth drivers, including Volta, cloud, and Nintendo Co., Ltd (ADR) NTDOY Switch, that will allow Nvidia to continue its pattern of earnings beats and guidance raises.

Price Action

AMD and Nvidia are both off to a hot start to 2018. AMD is up 24.8 percent in January, and Nvidia is up 21.8 percent.

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