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Morgan Stanley chip analyst Joseph Moore this morning reiterates an Equal Weight rating on shares of Advanced Micro Devices (AMD), writing that the market for graphics chips, or GPUs, that it sells, is likely to be cut in half in 2018 as it becomes less and less profitable to buy those cards for crypto currency “mining” efforts.

The issue, as Moore sees it, is that the payoff is already declining for mining from what it was just six months ago, when there was a big spike in purchases of chips from AMD, and, to a lesser extent, from Nvidia (NVDA).

Moore illustrates that with a table of the profit per GPU from mining the “ethereum” platform, which is a system of contracts a unit of currency called “Ethers":

The next stage is that Ethereum has gone through, and is heading for more, “forks,” changes in the way the software works. The one change, “Metropolis,” is already reducing the payoff, and by the beginning of the year, it won’t be profitable to mine crypto anymore, he surmises:

The next milestone is "Metropolis", but because of some complexity of implementation, Metropolis has been split into 2 phases, "Byzantium" and "Constantinople". Byzantium went live on October 16. Why does it matter? There were many significant changes, but from the standpoint of mining, the most significant is a reduction in the block reward from 5 units to 3, while simultaneously reducing the difficulty of the algorithm. he value of the block reward, 3 ethers, is worth about $900, for revenue of 900/723 or $1.24 per day. The average power cost of a mining rig under load will be in the ball park of $0.70 per day, for about $0.54 per day profit. This implies payback on the $100 of hardware net of resale of about 200 days. But each month, the 10% increase in difficulty will cut profits by 20% or so. With 10% increase in complexity per month (which would be deceleration from recent complexity levels, as we assume that mining decelerates in 4q given eroding economics), and constant Ethereum (difficult to know), in 1q18 we would see profits erode to the point that mining would cease to be profitable in areas with high power costs.

Next, the “Casper” fork, coming in the next year, will pretty much eliminate mining as a need to participate in and benefit from Ethereum:

For Ethereum, there is a plan in place to convert to proof of stake with the hard fork called "Casper", which is planned for the next 12-18 months. The goal would be to create better scalability, as proof of work bogs down with high transaction volume. This would sharply reduce the need for mining rigs, though it might not eliminate it, if there is enough demand to keep the metropolis "proof of work" concept alive. Miners could also shift to other cryptocurrencies that would still require mining to validate transactions.

He sees a sharp drop in sales of GPUs, which will hit AMD much harder than Nvidia:

We believe that total graphics sales for Ethereum mining in 2017 will be $800 mn or so, and will decline by 50% in 2018; we can validate the 2017 number by looking at the increased complexity of the algorithm. Unless Ethereum prices rally, downside variance to our 2018 forecast is more likely than upside. This could be more problematic for AMD, which has not been clear on the size of the exposure, than for NVIDIA, which has carefully outlined exposures and ensured that sthe Street models budget for significant declines [...] For NVIDIA, we see it as less of a factor, and we would be more constructive [...] And there are so many growth drivers between significant HPC/cloud growth, a PC gaming cycle next year with Volta, and strong growth in Nintendo, that it will be lost in the noise, in our view.

Moore points out that when Bitcoin, the first major crypto currency, dropped the use of GPUs in 2014, and instead switched to being mined on "application-specific integrated circuits," it resulted in a sharp drop in AMD sales of GPUs:

After a period of time, Bitcoin miners were able to develop "ASICs", (or application- specific integrated circuits), semi custom chips designed for the Bitcoin mining application. Graphics chips were made obsolete for that application. This caused AMD significant headwinds, as Bitcoin declined, and channel partners who had been unable to procure AMD chips during the period of shortage had shifted resources to NVIDIA. While AMD had made little reference during the period of strength, it quickly became a central factor behind weakness in its graphics business.

AMD stock today is down 25 cents, or 2%, at $11.01, while Nvidia shares are down $3.34, or 1.5%,at. $212.80, despite an upgrade over at BMO Capital.