NVIDIA forgot that Crypto crashes are bad for business.


Those who fail to learn from history will repeat it. Increasing demand for graphics cards from cryptocurrency miners is not a new phenomenon. NVIDIA (NVDA 4.01%). There is no inevitable fallout when crypto bubbles burst.

NVIDIA’s second quarter results were as bad as expected. The company warned earlier this month that demand for gaming graphics cards would be much lower than previously expected due to weakening demand. Inflated inventory levels at channel partners, which led to a significant slowdown in purchases. Nvidia’s gaming revenue fell 44 percent from the previous quarter.

There were a number of factors driving low gaming demand, but the fall in cryptocurrency prices may have been the biggest. NVIDIA graphics cards are used to perform the necessary number crunching for various cryptocurrencies, and once the miners’ return on investment disappears as the price drops, so does the demand for Nvidia’s products.

Estimated by pain

NVIDIA’s decline in gaming revenue shouldn’t come as a surprise to anyone who’s been following the company for at least a few years. The same thing happened at the end of NVIDIA’s fiscal 2019. Demand for graphics cards increased as cryptocurrency miners took advantage of sky-high prices, but all that demand disappeared after the bubble popped.

NVIDIA’s gaming revenue fell 46 percent in the fourth quarter of fiscal 2019, compared to the previous quarter, where it fell by the same percentage this time. It took until the outbreak of the pandemic for NVIDIA’s gaming revenue to fully recover.

Over time, NVIDIA's quarterly gaming revenue.

Data source: NVIDIA. Chart by author.

NVIDIA’s problem is that it doesn’t have a good idea of ​​how much gaming demand is tied to cryptocurrency. Cryptocurrency miners buy graphics cards through the same channels as gamers, so the demand picture increases. Still, a reasonable guess at this point was “a lot,” the height of cryptocurrency frenzy during the pandemic.

Nvidia shouldn’t have been blindsided by a huge drop in demand for graphics cards as cryptocurrency markets began to tank earlier this year. It still happened. one more time. NVIDIA allowed channel inventories to balloon, and now it’s paying the price. The company is using discounts to move inventory and has taken $1.34 billion in costs related to current inventory and purchase obligations.

This time may be worse than the last time because the crypto crash is not the only reason. On the back of reduced demand from cryptocurrency miners, the PC market collapsed. Global PC shipments fell 12.6% year over year in the second quarter, the steepest decline in nine years. Other chip companies, incl Intel And Micron, are also facing demand problems. Economic uncertainty, sky-high inflation, war in Europe, lockdowns in China, and at least some demand delays during the pandemic all contribute to the current crisis.

Silver lining

The good news for NVIDIA is that its data center business is still doing well. Data center revenue was flat in the second quarter, up slightly from the first quarter as demand from cloud computing customers remained strong. The data center segment is now NVIDIA’s largest, and it’s bigger than when the company saw gaming sales fall. This helps smooth out the impact when Nvidia works to lower channel inventory.

The big question, however, is whether data center demand will continue to strengthen. Nvidia believes that GPU demand in cloud computing platforms still outstrips supply, but as we’ve seen in the gaming business, shortages can quickly turn into insanity. If demand for cloud computing services begins to slow, that will eventually translate into lower demand for NVIDIA’s data center products.

NVIDIA’s second quarter was a disaster, and guidance for the third quarter calls for more pain. The company expects total revenue to decline another 12% sequentially, with a large decline in gaming revenue partially offset by data center revenue growth. It will take at least a few quarters for the inventory situation to adjust, and possibly if demand for gaming graphics cards weakens further.

Expect low revenue and very low profits from NVIDIA until supply and demand come back into balance.

Timothy Green has jobs at Intel. The Motley Fool has positions and recommends Intel and Nvidia. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.





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