Nvidia was recently hit with multiple class action lawsuits following this year’s cryptocurrency crash.
Nvidia, if you didn’t know is the largest maker of GPUs (Graphics Processing Unit).
GPUs are designed for graphics and image processing and are extremely good at math calculations, in fact, their highly parallel structure makes them more efficient than general-purpose CPUs for algorithms that process large blocks of data in parallel.
This also makes them an ideal candidate for cryptocurrency mining, which is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger.
You might have heard in recent years about mining rigs, or, specialized computers that are mining Bitcoin or Ethereum or even had a friend that was mining for their side income.
You may have wondered how the mining process works and why can people earn money by just running their computers.
Every cryptocurrency transaction is recorded. Each time this happens a cryptocurrency miner is responsible for verifying the transaction’s authenticity and updating the blockchain with its information. The mining process itself involves competing with other miners to solve complicated mathematical problems with cryptographic hash functions that are associated with a block containing the transaction data.
The first cryptocurrency miner to crack the code is then authorizing the transaction, and in return earns small amounts of cryptocurrency that is loaded into their crypto provider wallet.
In order to be competitive with other cryptocurrency miners, though, a cryptocurrency miner needs a computer that can keep up with the calculations, one that is loaded with GPUs.
As cryptocurrency boomed, its mining has become more profitable and popular, adding more miners every month.
Miners that stocked their rigs with Nvidia GPUs, prompting the stock to rise.
When the cryptocurrency market crashed, however, mining was no longer as profitable.
In fact, in some cases, the cost of running mining rigs would surpass its potential earnings, driving miners to stop acquiring Nvidia GPUs and the stock to crash.
According to Pomerantz Law Firm, which filed a Class Action against Nvidia Corporation:
“Defendants assured investors that NVIDIA and its executives are “masters at managing [the Company’s] channel” and “understand the channel very well,” despite analysts’ increasing qualms regarding NVIDIA’s inventory management in that market. NVIDIA also consistently downplayed the Company’s growing reliance on cryptocurrency-related sales, representing to investors that the cryptocurrency market made up little of NVIDIA’s revenue. Defendants also touted the strong demand for its computer gaming GPUs, assuring investors that NVIDIA’s computer gaming customer base would compensate for any decline in revenue from cryptocurrency-related sales. gaming GPUs, assuring investors that NVIDIA’s computer gaming customer base would compensate for any decline in revenue from cryptocurrency-related sales.”
In short: The company has downplayed its earnings from the cryptocurrency boom and assured investors that its sales to the ever-expanding gaming market will compensate for any crypto decline, which proved to be false.
On November 15, 2018, NVIDIA disclosed that its revenue would decline by over 7% for the fourth fiscal quarter, which was contrast to the 17% growth its management has led investors to believe.
To add insult to injury, Jensen Huang – Nvidia’s CEO was quoted saying: “Our near-term results reflect excess channel inventory post the crypto-currency boom, which will be corrected.”
According to CNBC, Nvidia’s revenue from original equipment manufacturers and intellectual property totaled $148 million, which was down 23 percent year over year but above the FactSet consensus estimate of $102 million. Nvidia chocked up the decline to “the absence of cryptocurrency mining” in its earnings statement.
The Schall Law Firm is leading another class action suit and alleges that Nvidia made “false claims” to investors about their ability to maintain demand and withstand any drops in the crypto market.
In this writer’s opinion Nvidia’s early claims, if found true in court can lead to a vote of non-confidence in Huang and additional management in the company.
This can even escalate to hefty fines and cause the stock to collapse further.
2019 can be a turbulent year for the company. Add to that an unstable stock market and unclear trade policy and that could spell trouble.