Bitcoin may weigh in on tech stocks again. Investors must be careful.


“Blame it on Bitcoin” may be a new catchphrase if the tech sector continues to sink.

Semiconductor manufacturer

Nvidia

(ticker: NVDA) was down 8.1%, to $ 532.94, in recent trading amid a broader defeat in the tech sector

Nasdaq Composite

index. The chip stock stands out because the company issued a strong earnings report on Wednesday, which includes a surge in products related to Bitcoin and other cryptocurrencies.

Aplication of payment

Square

(SQ), meanwhile, also continued its slide, falling 4.3% to $ 227.09. The company’s relatively strong earnings report on Tuesday included Bitcoin investments and operating earnings, with the firm saying it plans to “double down” on the digital currency. That may be weighing on stocks, which are down nearly 20% in recent sessions as Bitcoin prices have plunged.

Technology is under pressure for other reasons: Strong valuations have made the sector vulnerable to weak company forecasts. Rising bond yields pose a threat by putting pressure on the present value of future cash flows. Big Tech is also a crowded trade that could be losing popularity as investors seek more cyclical exposure or sectors with lower valuations.

But the trading patterns on Nvidia, Square,

Tesla

(TSLA) and other stocks may also be a sign of Bitcoin’s growing influence. Companies are investing capital in Bitcoin directly and in related products and services, expanding exposure at a time when prices have soared more than 350% last year. Despite its recent drop, Bitcoin is still up 67% this year.

Cryptocurrencies are certainly gaining 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 an overstatement to turn Bitcoin into a viable currency for everyday purchases, a

MasterCard

executive noted at a conference Thursday.

“Bitcoin does not behave like a payment instrument,” said Ann Cairns, executive vice president of Mastercard, according to a MarketWatch report. “It is too volatile and takes too long to transact.

Whether it becomes an asset class or a payment instrument, the rise (and possible fall) of Bitcoin is sweeping through the corners of technology, banking, and other sectors.

Nvidia, for example, issued an impressive earnings report, such as Barron indicated. But it is also becoming more of a crypto game.

The company said that cryptocurrencies may have had a positive impact of $ 100 million to $ 300 million in the quarter. The firm is launching a new line of cryptocurrency mining processors, or CMPs, for professional cryptocurrency mining.

“Cryptocurrencies have recently started to be accepted by companies and financial institutions and are showing greater signs of resistance,” Nvidia told investors. Its new CMP line will give the company more visibility on the contribution of cryptocurrencies to revenue, the company added.

Some analysts question the sustainability of the trend. Piper Sandler’s Harsh Kumar reiterated an overweight rating on stocks, for example, but warned of Nvidia’s growing exposure to cryptocurrencies.

“With cryptocurrency re-entering the scene, the delineation between cryptocurrencies and mainstream gaming advantages becomes blurred,” he writes. “We believe that investors may question the sustainability of these trends, particularly given cryptocurrency problems in the past.”

The Square payments app, as noted above, is now also in the thick of the Bitcoin debate. While core business trends look healthy, investors may be concerned that Square is expanding into crypto as prices peak. The company bought $ 170 million of Bitcoin in the quarter, in addition to the $ 50 million purchased previously, and is marketing its Cash app as a mechanism to buy, store, and eventually transact with the cryptocurrency.

Wall Street has mixed opinions on that idea. Competitors like

PayPal Stock

(PYPL) are also dabbling in Bitcoin, along with other “neobbank” competitors, JMP analyst David Scharf notes. That raises questions about the long-term “stickiness” of Cash App and whether its growth can be sustained.

In fact, the Cash App now accounts for about half of Square’s gross profit, and the company is counting on Bitcoin to drive demand. That makes Square’s stock something of a bitcoin derivative; Stocks have been increasingly correlated with the price of Bitcoin over the past year, and the relationship may only be narrowing.

Square stocks may not fully account for the volatility of Bitcoin, which has had several boom and bust cycles. At around 100 Ebitda estimated for 2022 (earnings before interest, taxes, depreciation and amortization), the stock appears to be fully valued, according to Scharf, who maintained a Market Perform rating.

Guggenheim’s Jeff Cantwell took the opposite side of that debate. He updated Square’s stock to Buy on Thursday, in part due to an optimistic outlook for Bitcoin. “We believe Bitcoin is on a higher long-term trajectory,” he writes, adding that it should drive an increase in the use of the Cash app and other metrics.

He does not believe that Bitcoin will become a currency used for conventional purchases anytime soon. But that’s beside the point, he notes, as Bitcoin is turning into “digital gold,” a store of value and an asset class. There are 50 million bitcoin digital wallets around the world, a large and growing user base, he notes. Square is doing its part to bring Bitcoin to the mainstream.

Cantwell expects Square shares to reach $ 288. Bitcoin may have to do its part as well to get stocks there.

Write to Daren Fonda at [email protected]

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