Video card maker EVGA terminates its long-standing partnership with NVIDIA, sending shockwaves through the industry.
For over two decades, EVGA was a top manufacturer of NVIDIA (NASDAQ: NVDA) graphics cards. Citing poor treatment from NVIDIA, EVGA recently decided to terminate that partnership and cease making video cards altogether.
Key among EVGA’s complaints include concerns around NVIDIA not adequately sharing price and cost information with its partners in advance of the public launch of such information, making it hard to plan. In addition, EVGA was concerned that NVIDIA was undercutting its partners like EVGA by pricing NVIDIA’s own “Founders Edition” cards to below the total costs that EVGA faced to make their cards.
A potential tempest in a teapot
In many cases, the loss of a long-term partner can turn into a major disruption to a company’s business. In this case, however, NVIDIA seems to be taking the news fairly well in stride. Not long after EVGA’s announcement, NVIDIA formally announced the launch of its 4000 series GPUs, with pricing for the flagship 4090 estimated at $1,599 and a launch date in October 2022.
That’s a testament to the breadth of other partners that NVIDIA has when it comes to its GPUs. Other partners include MSI, Zotac, ASUS, and Gigabyte . NVIDIA is clearly expecting those other partners -- and perhaps its own Founders Edition cards -- to pick up the slack and fill in the hole in the market caused by EVGA leaving it.
Indeed, there’s good reason to believe that EVGA leaving the market will make it that much easier for NVIDIA’s other remaining partners to survive and thrive. After all, the overall market for video cards isn’t expected to change all that much just because EVGA decided to leave the industry. The same size market with fewer suppliers in it means that much more business for the remaining suppliers.
Why there could still be problems for NVIDIA
Of course, while EVGA leaving the industry isn’t really a risk for NVIDIA, the recent major collapse in Cryptocurrency prices could reduce overall demand for its cards. This is because graphics cards are often used for cryptocurrency mining, and lower prices for cryptocurrencies makes mining for them less attractive. That, along with Ethereum’s recent shift to “proof of stake”, which lowers computational demands (and thus the need for high-powered mining cards), could cause issues for NVIDIA.
Indeed, there are signs of an overabundance of supply of graphics cards on the market as cryptocurrency prices drop and Ethereum shifts its model. The challenge this brings for NVIDIA is that it’s hard to justify a premium price point for the latest and greatest model when the immediate prior generation is still very, very good and available for far less cost.
For gamers -- the key audience for graphics cards before cryptocurrency became a thing -- it’s quite possible to have a reasonable gaming experience without owning the latest technology. Indeed, according to Steam’s recent hardware survey, three of the top four cards in use on its platform as recently as August 2022 come from NVIDIA’s 1000 series. That’s three generations before the just announced 4000 series.
The risk to NVIDIA is that a move to an inexpensive (albeit somewhat used) 3000 series card might be far more attractive to those gamers than paying full price on a new 4000 series one. As a result, unless a rebound in cryptocurrency drives mining demand back up, it could be tough for NVIDIA to see the uptake of its 4000 series cards that it is hoping to see.
Go in eyes wide open
It’s clear that challenges from the cryptocurrency market has more to do with NVIDIA’s recent stock price decline than issues arising from EVGA’s decision to stop manufacturing graphics cards. As you’re projecting NVIDIA’s future cash flows as part of your investing decision, it might make sense to model two potential paths for the company’s future.
By considering both the high side of a return to cryptocurrency mining and the low side of a future of largely gaming demand, you can come up with a range of potential values for the business. Understanding that range and the drivers behind it can go a long way towards helping you make a smarter decision when it comes to investing in NVIDIA.
At the time of publication, Chuck Saletta had no investment position in NVIDIA.
