Absorb The Pains To Get The Gains

I'm continuing my theme from yesterday about companies struggling to balance production capacity with the demand for their product. In good times they ramp up capacity as quickly as possible, incurring significant costs, but when demand drops, they are stuck with too many expensive employees and equipment.

This is what happened to Nvidia during the crypto boom of 2017. Nvidia gaming chips were being used to mine crypto, meaning Nvidia's loyal gaming clients could not access these chips unless they paid significant premiums in the secondary market. Nvidia refused to increase the price of these chips because they did not want to squeeze the loyal gaming clients directly.

The crypto demand surge resulted in the Nvidia share price going from $25 a share (adjusted for the split) to $70 a share inside 18 months. Then it dropped fast and hard to $32 a share in the three months after cryptos crashed. It was not Nvidia's fault that this happened.

The good news is that the thesis for gaming and data centre growth remained. The stock grew from those lows to become a 10 bagger. It reached $330 a share in November last year and now trades around $235. As we always say, you have to absorb the pains to get the gains.