“Blame it on Bitcoin” may be a new catchphrase if the tech sector keeps sinking.
Semiconductor maker Nvidia (ticker: NVDA) was down 8.1%, at $532.94, in recent trading amid a broader rout in the tech-heavy Nasdaq Composite index. The chip stock stands out because the company issued a strong earnings report Wednesday, including a lift from products related to Bitcoin and other cryptocurrencies.
Payments app Square (SQ), meanwhile, also continued its slide, down 4.3%, at $227.09. The company’s relatively strong earnings report on Tuesday included investments and operational gains from Bitcoin, and the firm said it plans to “double down” on the digital coin. That may be weighing on the stock, which is down nearly 20% in the last few sessions as Bitcoin prices have slumped.
Tech is under pressure for other reasons: Steep valuations have made the sector vulnerable to weakness in company forecasts. Rising bond yields pose a threat by pressuring the present value of future cash flows. Big Tech is also a crowded trade that could be losing favor as investors look for more-cyclical exposure or sectors with lower valuations.
But the trading patterns in Nvidia, Square, Tesla (TSLA), and other stocks may also be a sign of Bitcoin’s growing influence. Companies are plowing capital into Bitcoin directly and related products and services, expanding exposure at a time when prices have skyrocketed more than 350% in the past year. Despite its recent slide, Bitcoin is still up 67% this year.
Crypto is certainly gathering momentum. Mastercard (MA) said this month that it would start supporting cryptocurrencies directly on its network, noting that many consumers are already using cards to buy crypto assets. But it would still be a stretch to turn Bitcoin into a viable currency for everyday purchases, a Mastercard executive noted at a conference on Thursday.
“Bitcoin doesn’t behave like a payment instrument,” said Mastercard Executive Vice Chair Ann Cairns, according to a report on MarketWatch. “It’s too volatile and it takes too long to transact.”
Whether it becomes an asset class or payment instrument, the rise (and potential fall) of Bitcoin is ripping through corners of tech, banking, and other sectors.
Nvidia, for instance, issued an impressive earnings report, as Barron’s noted. But it’s also becoming more of a crypto play.
The company said crypto may have had a $100 million to $300 million positive impact in the quarter. The firm is launching a new line of cryptocurrency mining processors, or CMPs, for professional crypto-mining.
“Cryptocurrencies have recently started to be accepted by companies and financial institutions and show increased signs of staying power,” Nvidia told investors. Its new line of CMPs will give the firm more visibility into the contribution of crypto to revenue, the company added.
Some analysts are questioning the sustainability of the trend. Piper Sandler’s Harsh Kumar reiterated an Overweight rating on the shares, for instance, but cautioned about Nvidia’s growing exposure to crypto.
“With cryptocurrency entering the picture again, the delineation between crypto and core gaming upside is blurred,” he writes. “We feel investors may question the sustainability of these trends, particularly given the cryptocurrency issues in the past.”
Payments app Square, as noted above, is also now squarely in the Bitcoin debate. While core business trends are looking healthy, investors may be concerned that Square is expanding into crypto as prices peak. The company purchased $170 million of Bitcoin in the quarter, on top of $50 million previously purchased, and is marketing its Cash App as a mechanism to buy, store, and eventually transact with the cryptocurrency.
Wall Street has mixed views on that idea. Competitors like PayPal Holdings (PYPL) are also plowing into Bitcoin, along with other “neobbank” competitors, notes JMP analyst David Scharf. That raises questions about the long-term “stickiness” of Cash App and whether its growth can be sustained.
Indeed, Cash App now accounts for about half of Square’s gross profits, and the company is counting on Bitcoin to fuel demand. That is making Square stock a kind of derivative on Bitcoin; shares have been increasingly correlated to the price of Bitcoin over the past year, and the relationship may only be getting tighter.
Square stock also may not be fully accounting for the volatility of Bitcoin, which has had several boom-bust cycles. At around 100 estimated 2022 Ebitda (earnings before interest, taxes, depreciation, and amortization), the stock looks fully valued, according to Scharf, who maintained a Market Perform rating.
Guggenheim’s Jeff Cantwell took the opposite side of that debate. He upgraded Square stock to a Buy on Thursday, partly on an upbeat outlook for Bitcoin. “We think Bitcoin is on a long-term trajectory higher,” he writes, adding that it should drive an increase in Cash App usage and other metrics.
He doesn’t see Bitcoin becoming a currency used for mainstream purchases anytime soon. But that’s beside the point, he notes, since Bitcoin is turning into “digital gold”—a store of value and an asset class. There are 50 million digital Bitcoin wallets globally, a large and growing user base, he notes. Square is doing its part to take Bitcoin mainstream.
Cantwell sees Square stock hitting $288. Bitcoin may have to do its part for the stock to get there, too.
Write to Daren Fonda at [email protected]
