Nvidia warning left space for extra crypto slack

Nvidia investors are already bracing for weak Q2 results after the stock market closes today, but an advance announcement on August 8 that sales for the period would be lower than it had estimated in May did not necessarily contain all the bad news about reduced demand from cryptocurrency miners .

The company said revenue will come in at about $6.7 billion, 17% below a forecast in May, primarily due to reduced demand for its graphics chips from gaming hardware makers, citing “macroeconomic headwinds” as the likely cause.

However, the announcement did not directly address the issue of demand for graphics processing units (GPUs) from cryptocurrency miners. While the company said in recent filings with the US Securities and Exchange Commission that there are too many variables for it to accurately predict demand for miners, there is one big change coming that they know about.

Next month, Ethereum, the blockchain that underpins the second-largest cryptocurrency by market capitalization, is expected to undergo perhaps the most significant change in its seven-year history: a shift to a model for securing the network called proof-of-stake. As a result, miners, who are currently responsible for generating new coins and maintaining the network, will not only have a hugely reduced need for the GPUs, they will likely look to sell them, flooding the market and driving down prices.

Ethereum miners have been heavily using Nvidia’s flagship gaming GPUs to mine ether, putting pressure on the company’s ability to meet players’ demands and prompting Nvidia to launch a specialized Cryptocurrency Mining Processor (CMP) line last year, but interest in the product has waned. . CMPs accounted for “a negligible amount” of revenue in the first quarter compared with $155 million a year earlier, according to Nvidia’s latest quarterly report.

In its pre-announcement of Q2 results, Nvidia said gaming revenue accounted for $2.04 billion of sales, down 33% from a year earlier and 44% from Q1, while its data center segment has been affected by supply chain disruptions, with preliminary at $3.81 billion, making it the firm’s largest segment. It is below the company’s expectations, but still a record and up 61% from the 2021 quarter.

“There has clearly been some impact from both softer crypto demand and Ethereum’s shift to proof of stake, and these factors, more than changes in gaming, are the reason behind their lower expectations for gaming GPUs in the July quarter,” says Matt Bryson, senior vice president of equity analysis at Wedbush. “Whether the decline in July fully accounts for these changes or whether there is still more room for sales to decline is one of the main questions heading into the earnings call.”

He believes the company “has solved most of the distortion of the crypto bubble”, and estimates that Ethereum miners could have been responsible for 20–25% of Nvidia’s gaming revenue, but also that “sales may fall modestly for one more quarter before stabilizing.” Bryson reiterated his ‘neutral’ rating on the stock with a price target of $190, citing “excellent demand issues going forward.”

Fortunes have turned quickly for the Santa Clara, Calif.-based giant and other chip makers in recent months as growing inventories collide with shrinking demand. Micron Technology, Intel and Advanced Micro Devices have warned against fading export orders. Citigroup recently said it expects “the worst semiconductor decline in at least a decade, and possibly since 2001 given the expectation of a recession and inventory build-up.”

Despite the sell warning, NVDA is currently priced at 35 times the company’s estimated trailing 12-month earnings, well above its peers. Intel trades around 14 times forward earnings. The Philadelphia Stock Exchange Semiconductor Index is priced at approximately 16 times.