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NVIDIA forgot that crypto crashes are bad for business


Those who do not learn from history are doomed to repeat it. The growing demand for graphics cards from cryptocurrency miners is not a new phenomenon for Nvidia (NVDA -9.23%). Nor is the inevitable demand crash when crypto bubbles burst.

NVIDIA’s second quarter results were about as bad as expected. The company warned earlier this month that it would be well below its previous outlook as demand for gaming graphics cards weakens. Channel partner inventory levels had become inflated, leading to a major slowdown in purchases. NVIDIA’s gaming revenue fell 44% from the prior quarter.

Several factors have led to a drop in demand for games, but the cryptocurrency price crash may be the greatest. NVIDIA’s graphics cards are used to perform the calculations needed to mine various cryptocurrencies, and once the return on investment for miners disappears as prices fall, the demand for NVIDIA products also declines.

Painfully predictable

NVIDIA’s slumping gaming revenue should come as no surprise to anyone who’s been following the company for at least a few years. Exactly the same thing happened towards the end of NVIDIA’s 2019 fiscal year. Demand for graphics cards had increased as cryptocurrency miners took advantage of sky-high prices, but once the bubble burst, all that demand disappeared.

NVIDIA’s gaming revenue fell 46% in the fourth quarter of fiscal 2019 compared to the previous quarter, roughly the same percentage drop as this time around. It took until the onset of the pandemic boom for NVIDIA’s gaming revenue to fully recover.

NVIDIA quarterly gaming revenue over time.

Data source: Nvidia. Table by author.

The problem NVIDIA faces is that it doesn’t have a good idea of ​​how much cryptocurrency-related gaming demand actually is. Cryptocurrency miners purchase graphics cards through the same channels as gamers, so the demand picture becomes confusing. Still, a reasonable guess this time around would have been “a lot,” given the intensity of the cryptocurrency frenzy during the pandemic.

Cryptocurrency markets began to implode earlier this year, so a sharp drop in demand for graphics cards shouldn’t have blinded NVIDIA. And yet it did. Still. NVIDIA let channel inventories swell, and now it’s paying the price. The company uses rebates to move inventory and took $1.34 billion in charges related to its current inventory and purchase obligations.

This time could be much worse than last time as a crypto crash is not the only factor. Along with decimated demand from cryptocurrency miners, the PC market is in shambles. Global PC shipments fell 12.6% year-over-year in the second quarter, the biggest decline in nine years. Other chip companies including Intel and Micron, are also experiencing demand issues. economic uncertainty, skyrocketing inflationthe war in Europe, the lockdowns in China, and at least some of the demand that has been put forward during the pandemic are all contributing to the current predicament.

A silver lining

Good news for NVIDIA is that its data center business is still doing very 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 biggest by far, and it’s much bigger than it was the last time the company saw its game sales plummet. This will help mitigate the impact as NVIDIA works to reduce channel inventory.

The big question, however, is whether data center demand will remain strong. NVIDIA believes that demand for GPUs on cloud computing platforms always exceeds supply, but as we’ve seen in the gaming industry, shortages can quickly turn into a glut. If demand begins to slow for cloud computing services, this will eventually translate into lower demand for NVIDIA’s data center products.

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

Until supply and demand return to equilibrium, expect lower revenue and much lower profits from NVIDIA.

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


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