76report

b9dafc3fc9

February 28, 2025
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76report

February 28, 2025

NVIDIA Results Reinforce AI Theme; Crypto Markets Slide after a Major Exchange Is Hacked

A volatile week for artificial intelligence and crypto investments appears to be ending on a relatively positive note—or at least showing some signs of stability.


NVIDIA (NVDA) earnings on Wednesday provided what we view as a positive read-across for the AI investment theme, although the shares subsequently came under pressure because of the profit margin outlook.


Meanwhile, Bitcoin and other crypto assets experienced heavy selling pressure this week after a $1.5 billion cyberattack on a foreign crypto exchange (more on that below).


Representing around 6% of the S&P 500 Index, NVDA is an important stock to track for many reasons, even if one is not directly invested in the shares.


NVDA is the critical supplier of technology enabling the AI data center buildout that is driving growth across the economy.  


It has been a few weeks since Chinese start-up DeepSeek caused the market to question the sustainability of AI-related investment.


NVDA’s revenue results, coming on the heels of reassuring capital spending announcements from several big tech companies, demonstrate the resilience of the AI investment theme.


This is positive for the stock market as a whole—and especially stocks that stand to benefit from the AI buildout.  

The idea that the next generation could have thousands times and even… millions of times more compute than today is in our future…. The next wave is coming, agentic AI for enterprise, physical AI for robotics and sovereign AI as different regions build out their AI for their own ecosystems. And so, each one of these are barely off the ground, and we can see them. - Jensen Huang, NVIDIA CEO (2/26/2025)

Sustained growth


Trading at around 29 times estimated earnings per share for calendar year 2025, versus the S&P 500 Index at about 22 times, NVDA has a relatively high multiple.


This elevated earnings multiple is arguably justified if expected growth persists in the years ahead—but it also leads to a lot of sensitivity in the share price to even slight disappointments.


NVDA is no doubt an impressive company. Valuation concerns and other risk factors explain why we have not included the stock within our Model Portfolios—along with consideration of the fact that most investors already have substantial exposure via widely owned indices.


NVDA shares actually traded higher immediately after the earnings results were posted, as the company generally met expectations. Shares then drifted over the course of the week in response to concerns about potential downward pressure on its very high profit margins.


While analysts debate the margin outlook, revenue did not disappoint this quarter. As an indicator of broader market demand for AI, revenue is the most relevant metric.


The Data Center segment generated quarterly revenue of $35.6 billion, up 16% from the previous quarter and up 93% from a year ago. Full-year revenue in the segment rose 142% to a record $115.2 billion.

Data Center Revenue (Source: NVDA)

The company’s Data Center business was almost an afterthought just a few years ago, when NVDA was seen primarily as a technology provider to the video game industry.


The Data Center segment now represents nearly 90% of total company revenue.


As NVIDA’s business matures, it becomes more challenging to achieve high growth rates off of a larger base. Nonetheless, analysts generally expect greater than 50% growth in NVIDIA sales in the current fiscal year relative to the one just completed.


Commentary on the earnings call focused on strong take-up for NVDA’s next generation products, including its new Blackwell platform.


Analysts also probed CEO Jensen Huang about DeepSeek.


When attention shifted to the Chinese AI start-up in late January, investors dumped NVDA shares and other related AI plays. The fear at that moment was that AI capacity could now be produced with much lower investment.


NVDA shares peaked in early January around $149 but then got as low as $116 following the DeepSeek story. They have since recovered and seem to be settling in now somewhere in between.

NVDA share price (year to date)

Jensen Huang’s comments on the conference call pointed to a big picture understanding of AI as a very early stage endeavor.


Efficiency breakthroughs, such as those demonstrated by DeepSeek, are not only to be expected but should accelerate innovation in AI. Over time, this will only increase demand for AI-related technology.

And going forward, I think it’s fairly safe to say that that world is going to be almost all software that will be infused with AI…. And we’re really two years into that journey, and in modernizing computers that have taken decades to build out…. [N]o technology has ever had the opportunity to address a larger part of the world’s GDP than AI. - Jensen Huang, NVIDIA CEO (2/26/2025)

AI has become such a dominant topic in markets and society overall that is almost hard to believe, as Jensen noted, that it has only been two years since growth in NVDA’s Data Center segment really began to take off.


Like the internet and other technology breakthroughs, AI is going to transform the economy over the course of decades.


Investors should not have their entire portfolio directly tied to the AI theme, but given the long-term potential, we continue to recommend meaningful allocations to these opportunities.


We encourage investors to consider some of our preferred plays, such as Oracle (ORCL), Digital Realty (DLR), Eaton (ETN) and Texas Instruments (TXN).

Crypto shakeout


Another technological revolution underway is crypto. While recent data points are supportive of the AI theme, crypto related news flow has been less comforting.


The Trump victory set in motion a surge of positive developments on the legal, political and regulatory fronts for the crypto industry. Crypto assets have generally performed quite well since last November.


Bitcoin, which by market capitalization represents about 60% of the entire cryptocurrency universe, reached an all-time high around $109,000 in late January 2025. Bitcoin was trading below $70,000 prior to Election Day.


As recently as last Friday (2/21/2025), Bitcoin was trading above $99,000. As we write, Bitcoin is around $84,000. It got as low as $78,000 early Friday morning (2/28/2025).

Bitcoin price (last 3 months)

Other relatively large crypto assets, such as Ethereum, XRP and Solana, have seen even steeper declines since last Friday, along the lines of 15% to 20%.


Major platform hack


Crypto is inherently volatile, and movements are often hard to interpret.


However, the widely acknowledged catalyst for these recent declines is the hacking of Bybit, a Dubai-based crypto platform that is not permitted to operate in the United States.


On February 21, 2025, North Korean hackers carried out a massive cyberattack on Bybit, which is one of the world's largest cryptocurrency exchanges.


Approximately $1.5 billion worth of Ethereum tokens were stolen. Ethereum is the cryptocurrency with the second highest market capitalization after Bitcoin.


The Bybit hack is considered the largest cryptocurrency hack to have ever occurred. The FBI has attributed this attack to a North Korean hacking group called the Lazarus Group.


During a routine transfer from a cold wallet (long-term storage) to a warm wallet (used for daily trading), the hackers were able to penetrate Bybit’s systems.


Remarkably, Bybit has told customers it will backstop the losses (and has the wherewithal to do so) even if the stolen Ethereum tokens are not recovered.


It is important to emphasize that the hack was on the systems of a foreign exchange, rather than the Ethereum network itself. A comparable scenario might be cash stolen from an online bank account.


Nonetheless, the high profile hack diminishes confidence in crypto markets, which have also been plagued in recent weeks by a number of “rug pull” meme coin scandals. Investors have seen sharp losses after meme coin creators immediately dumped their coins on the market.


Additionally, the downward pressure on crypto markets can also be attributed to the liquidation of stolen tokens (some of which were quickly sold to acquire Bitcoin)—or concerns that they will be.


As with any asset class, selling itself can lead to more selling as investors exit to avoid further losses.


Bitcoin ETFs, the first of which came to market in January 2024, have seen more than $2 billion of outflows this week. Many investors in these products are new to crypto and were likely rattled by the sudden downside volatility.


How should investors respond?


We continue to have a positive long-term view on Bitcoin as we develop our perspective on other cryptocurrencies and crypto-related investments.


Investors looking to accumulate Bitcoin and other assets may wish to view this recent hit to crypto market sentiment opportunistically.


As we have emphasized in the past, Bitcoin is a highly volatile investment. Its value will fluctuate substantially. Smaller crypto assets generally show even greater volatility.


The main appeal of these assets is that they represent emerging technologies and have the potential to grow substantially in value over time.


The path forward, however, is likely to involve many twists and turns. There is also no guarantee whatsoever that any of these assets will be successful in the future.


We suggest investors interested in the space take a long-term view and size their investments judiciously. Do not invest more than you can stand to lose.


If short-term losses of 10% to 20% are unbearable, this could be seen as a sign that one’s level of investment is too great… or that the asset class is not appropriate for the investor.

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