To The Moon

US Securities and Exchange Commision (SEC) just fined $NVIDIA Corp(NVDA)$$5.5 million to settle charges that it unlawfully obscured how many of its graphic cards were sold to cryptocurrency miners.

Its order claims Nvidia misled investors by reporting a huge boost in revenue related to “gaming,” hiding how much its success relied on the far more volatile crypto market. Nvidia isn’t admitting to wrongdoing as part of the settlement, but it agrees to stop any unlawful failures to disclose information.

How it all started

During Nvidia’s fiscal year 2018 financial reports the SEC notes Nvidia saw an explosion in crypto mining-related sales in 2017, when the rewards of mining Ethereum grew dramatically. Crypto mining was widely reported as a cause of GPU scarcity, and Nvidia launched a separate CMP line specifically for mining, attempting to prevent shortages for gamers.

Given the boom-and-bust nature of cryptocurrency, this meant Nvidia’s sales numbers didn’t necessarily indicate reliable future growth, making investing in it riskier.

Disclosure Failures

NVIDIA’s analysts and investors were interested in understanding the extent to which the company’s Gaming revenue was impacted by crypto mining and routinely asked senior management about the extent to which increases in gaming revenue during this time frame were driven by crypto mining.

BUT, vidia didn’t mention mining-related sales as a factor in its gaming division’s success. Meanwhile, it mentioned crypto as an important factor in other markets, which suggested to the SEC that it was being deliberately deceptive. And investors’ anxieties turned out to be well-founded. A crypto crash in late 2018 (along with a weakening Chinese market) led it to slash its quarterly earnings projections by $500 million and spurred a shareholder lawsuit.

What does it mean for us?

According to the investigation, Nvidia conducted internal research which indicated this was how the cards were being used. Instead of notifying shareholders about this, they claimed to be increasing their market share in the gaming sphere. Of course, this becomes problematic for investors when crypto goes into a bear market (like now), and investors are left holding bags wondering why everyone is buying second hand cards from miners all of a sudden.

Short the stock? Put option? Make sure you keep in mind of the current crypto market, @CaptainTigerhas great article on it (which prompt me to write my previous article on current negative state of cryptocurrency). All the best! @TigerStars