While there is high demand and short supply in the first two years of the pandemic, Nvidia Corp.’s gaming cards have been hit by declines in three separate pandemic booms in 2022: sales of personal computers, video games and cryptocurrency.
Nvidia NVDA,
warned Monday morning that it expects $1.4 billion less in revenue than it had previously forecast, largely due to weak sales for its signature gaming gear, and took a toll on crowded inventory channels. In response, Nvidia shares fell 6.3% on Monday, continuing a decline sparked by concerns about a series of storms hitting its core business this year.
PC sales have retreated significantly after a two-year surge, and spending on video games and their equipment has also come back down to earth. At the same time, falls in cryptocurrency prices have made mining less profitable, and Nvidia cards have been widely used to mine for Ethereum ETHUSD,
and other crypto.
For more: Why semiconductor stocks are ‘virtually uninvestable’ despite record earnings amid global shortage
The result is that the demand for playing cards has fallen, just as waves of used playing cards have flooded the market from crypto miners looking to recoup some of their costs. While Nvidia cards can now finally be bought for close to the manufacturer’s suggested retail price after years of higher prices, sellers are still struggling to sell them as cheaper used cards become available, leading to overstocked inventory.
“While the cut is significant, we doubt it actually comes as a huge surprise, as gaming GPU data points have been increasingly negative for some time now, as severe scarcity quickly turned to abundance and crypto imploded,” Bernstein analyst Stacy Rasgon, which has an outperform rating and a $210 price target, wrote in a note on Monday.
If this all sounds familiar, it’s because something similar happened in 2018, when Nvidia suffered from what CEO Jensen Huang described as a “crypto hangover.” Susquehanna Financial analyst Christopher Rolland said he sees the “well-anticipated reset” as “reminiscent of the buying opportunity of 2018,” when record chip sales resulted in a large supply that took months to clear from inventory.
Nevertheless, Rolland still trimmed the price target to $210 from $220, as the decline was greater than he expected.
“Our hopes weren’t high in print, but games disappointed more seriously,” Rolland said, adding that he expects gaming cards to be even cheaper because “Nvidia can now offer pricing programs (discounts?) for channel partners in light of macro headwinds.” “
The drop was also much larger than Citi Research analyst Atif Malik expected, but that only made it even more similar to the 2018 situation.
“We expected game sales to slow significantly in October-Q, with an expected 30% top-to-bottom decline in game sales versus a 47% correction in 2018-19,” Malik, who has a buy rating and a $285 price target, said . “Gaming was down 44% in July-Q, and management expects weakness to continue in October-Q, showing a steeper and faster decline in gaming business than expected with macro headwinds impacting sales and pricing at channel partners.”
From 2021: Nvidia tries to prevent another ‘crypto hangover’ and analysts think it’s a ‘smart move’
While many analysts expected a slowdown in the gaming category, Nvidia also posted disappointing revenue results for its data center business and a sharp drop in gross margins, estimated at 46.1% against guidance of 67.1%, due to long-term purchase commitments made during the chip shortage and the inventory write-down.
CJ Muse, who has a rating and a $225 price target, said the data center shortage was “clearly a disappointment,” while weak performance was expected.
“Now, in response to weakened sales forecasts, management is working with gaming partners to adjust channel pricing and inventory, while slowing Opex growth to manage near-term profitability,” Muse said.
Nvidia’s early warning — the company expects to report second-quarter financial results on Aug. 24 — could be a lesson from Intel Corp. INTC,
which baffled some analysts last month by reporting unexpectedly poor results without any warning. In addition, Advanced Micro Devices Inc. AMD,
predicted a rare outlook that fell short of Wall Street expectations.
Nvidia shares have now fallen 12.6% so far this year, while the S&P 500 index SPX,
is down 6.6% and the PHLX Semiconductor Index SOX,
has fallen 12%.
